Site Centers Corp (SITC) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 DDR earnings conference call. My name is Mark and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Meghan Finneran, Financial Analyst. Please proceed.

Thanks, Mark. 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 these statements are subject to risks 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 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 supplement are available on our website at www.DDR.com.

Last, we will be observing a one question limit during the Q&A portion of our call in order to give everyone the opportunity 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 and thank you all for joining us today. Before I address the very successful quarter and the market we are seeing going forward, I'd like to share my thoughts with you with in regards to this particular forum and thank each of you for your many contributions to DDR over the years. While this is certainly not an official goodbye, I thought it appropriate and want to make sure that I have the opportunity to properly recognize this process which has been essential to our Company's evolution.

When I was named CEO, I felt it was important to personally reach out to the various constituents of the public markets including investors, analysts, and rating agencies to begin a dialogue that focused on our management team's renewed vision for the future of the Company while simultaneously ascertaining your respected view of that vision. My goal was to engage with the market, not fight the market, while listening and respecting your intellect and opinions. But still holding firm to what history taught this management team over the years. Most importantly, as the leader of this team, I believed it critical that we build a culture that emphasized delivery of what was promised and in so doing earn back the respect of those whom we disappointed in the past.

While I certainly won't go through the various and successes and failures over the past several years, I think it's very important that each of you on this call understand the quintessential role that you played in our success. You challenged us, doubted us, criticized us, praised us and most importantly educated us on what it would take to bring this Company not only back from the brink but, importantly, enhance our reputation, market perception, and credibility.

Whether it was through the hundreds of meetings with investors and analysts annually or through your generous commitment of time to participate in perception studies, whatever success we attained, it is directly attributable to our partnership with you. And for that, we are all extremely appreciative and will be forever grateful.

While we may not have always agreed on all matters, direction, or message, the respect level was evident and our conversations were meaningfully constructive. I believe DDR is an excellent example of how a transitional company and public market constituents can work together to save an institution, preserve several hundred jobs, and set a path for future stability and prosperity for all involved.

So as my time to address you in this forum becomes somewhat limited, I didn't want to miss the opportunity to thank you for being the professionals that you are. Thank you for helping a first-time CEO find success under difficult circumstance and thank you for enabling me to leave this Company to my successor in infinitely better shape than I found it, which should be the ultimate goal of every CEO. Most importantly, thank you for your support of the entire management team at DDR who remain laser focused on ensuring that this Company's best days are yet to come.

As we move forward with the call, I ask that you respect the fact that none of us here the room today are part of the selection process for my successor, so please let's spend our remaining time today talking about the business and the continued excellence and consistency produced by our team.

As you saw in our earnings release last night, we had another outstanding quarter. Our portfolio continues to be in high demand from retailers resulting in consistently strong same-store NOI growth, pre-recession leasing spreads, and incremental gains in portfolio occupancy.

Our retail partners continue to aggressively pursue and win market share through disciplined and thoughtful new store growth, coupled with complementary omni-channel investments, making the power center asset class the most desired format for retail growth across the country.

The supply/demand dynamic has never been more in our favor and our capital recycling program and portfolio transformation has left us with a portfolio of power centers that are in high demand for many of the best and most successful retailers. From specialty grocers to fast fashion to cosmetics, the power center format continues to evolve with convergence of concepts and merchandise while offering retailers the greatest access to the consumer and simultaneously protecting their margins due to the advantageous cost structure of our asset class relative to other retail formats.

In an era of cost-conscious and margin focused retailers, power centers continue to gain in popularity with growth conscious retailers, as was recently reiterated during Ulta's Investor Day just a few weeks ago. These dynamics have resulted in a dramatic increase in the credit quality of our cash flow coupled with a simplified structure and streamlined business model, our portfolio is positioned to withstand any economic environment and provides durability, consistency of earnings, and strong dividend growth for our shareholders.

Looking across the retail real estate industry more specifically, it is highly fragmented, particularly in the power center space. Our portfolio management team recently completed a study of the ownership of the entire power center universe.

There are nearly 115,000 retail properties in the domestic US totaling 9.6 billion square feet. Looking at the power centers specifically, there are approximately 7,000 power centers representing nearly 2.4 billion square feet or 25% of the entire retail real estate universe. That makes DDR's share of the power center market only 4% by square footage. If you were to add together all the power center portfolios of the largest public shopping center REITs in our sector, collectively, we own only 12% of the power center universe based on square footage.

The fragmentation in the power center space creates enormous opportunity for consolidation and one should expect those potential acquisitions be aggressively pursued by our team. So for these reasons and many others, I remain very optimistic about the future of the power center business and, of course, DDR in particular. We have built an outstanding team, our portfolio and balance sheet have never been stronger, and our retail partners continue to win market share.

As I think about my transition, I can't help but recall a quote about leadership and team building from one of the greatest business leaders of our generation Jack Welch. Welch stated quote, before you are a leader success is all about growing yourself; when you become a leader, success is all about growing others, unquote.

With that goal in mind, culturally we have worked hard to create a meritocracy populated with outstanding leaders, sharp real estate minds, and organizational structure and platform that is built for continued success and industry leadership. That is why I can comfortably attest that DDR's best days lie ahead.

Now, I'd like to turn the call over to Paul to commence addressing what's really important and significant and that's the continued execution of our strategic plan that has led to another consistent and outstanding quarter.

Thank you, Dan. As reflected by our strong results, momentum continued into the third quarter resulting in 342 new deals and renewals for 2.7 million square feet. Our leased rate improved by 30 basis points sequentially to 95.6%, our highest leased rate in 26 quarters or since the first quarter of 2008.

We achieved a positive pro rata new deal spread of 23.6%, a positive pro rata renewal spread of 8.2% and a combined spread of 11%. These spreads represent our highest spreads in 26 quarters. It is worth noting that this deal volume and these spreads were achieved with a level of CapEx that compares favorably with prior quarters. As you can see from our net effective rent disclosure, the total cost of new deals as a percentage of starting base rent declined to 15.5%, below our historical average cost of 20%. We see no concerning trends in the cost of new deals or renewals and remain focused on controlling these capital expenditures.

As the demand for prime power center space continues, these results demonstrate our ability to unlock organic growth opportunities while continuing to improve the merchandise mix and credit quality of cash flow even in the face of a high leased rate environment. As such, our Project Accelerate initiative continues to be a focus of our leasing team as they drive value by further improving the tenant base, growth profile, and credit quality of our assets through recapturing of high demand box space and releasing those units to market-share-winning retailers paying today's higher market rents.

Of the previously announced 26 boxes representing 710,000 square feet which we now control, I am pleased to inform you that we have either signed or are finalizing 19 leases with another three at LOI.

The average rental spreads achieved to date are between 30% and 40%, and we are achieving on levered cash cost returns from the low double digits to the midteens. Recently, we secured control of another four locations representing 165,000 square feet.

It is important to keep in mind that for many of these deals, we have an ongoing option or right to recapture, allowing us to control the timing and providing us with tremendous flexibility and limited downtime. While I offered a handful of examples during our second quarter call, I would like to provide a couple of additional examples to highlight the continued success we are having with this initiative.

First, we recaptured 31,000 square feet at our Shops at Midtown Miami, a 98% leased, 645,000 square-foot prime power center featuring the largest concentration of value-oriented retailers in the city of Miami. With an underperforming tenant occupying well-positioned space within the center, we proactively recaptured the space in advance of its natural lease expiration.

We are backfilling the recaptured space with Nordstrom Rack, which will significantly improve the center's overall merchandise mix, credit quality, and traffic. With minimal downtime and CapEx, we dramatically improve Midtown Miami's regional draw, NOI growth profile, and NAV by proactively identifying an opportunity and adding a premier tenant, Nordstrom Rack, which will open in the spring of 2015.

Separately, we negotiated the recapture of a [28,000] square-foot Barnes & Noble box at a 1.1 million square-foot prime power center in Orlando, which was acquired in 2013. We will be backfilling the Barnes box by splitting it into two units for Forever 21's new F21 Red concept, as well as a Carters and OshKosh combo store, improving the merchandise mix and credit quality of the overall center in addition to significantly beating our initial underwriting for this wholly owned asset. These two examples are typical of the many Project Accelerate success stories that have enabled us to generate the double-digit returns previously mentioned.

We recognize the unique current supply and demand environment and believe it will not last forever, and we remain focused on aggressively capitalizing on the opportunity at hand.

During our last call, I mentioned that we are proceeding with select ground-up development projects and continue to add fully stabilized prime power centers to our portfolio through this initiative. I would like to take a few moments to provide an update on development activity for the third quarter.

For those following DDR on Twitter, you may have noticed the grand opening of the Maxwell on October 6. A 240,000-square-foot urban, multistory, prime power center located in Chicago's South Loop, the Maxwell is anchored by Nordstrom Rack, T.J. Maxx, Dick's Sporting Goods, Pier 1, and Burlington Coat Factory. The Maxwell boasts a trade area population of 744,000 people with average household incomes of $91,000. All tenants opened on time and on budget; traffic and sales are strong, and we are excited about the future growth prospects of this asset.

Additionally, we officially broke ground on Guilford Commons in August, which will open in the back half of 2015. Located just east of New Haven, Connecticut, Guilford Commons will span 130,000 square feet and consist of three junior anchors including a specialty grocer and 40,000 square feet of shop and specialty space.

Lastly, we are on track to break ground in December on Lee Vista Promenade, which is a 450,000-square-foot multiphase development project in Orlando that will be anchored by a theater and offer a best-in-class line of junior anchor tenants and restaurant operators. The first phase of this project will open in the fall of 2015.

We're excited about our ability to successfully capitalize on current organic growth opportunities as demonstrated by our leasing results, despite a high leased rate of 95.6%. Initiatives such as Project Accelerate, the strategic monetization of our land bank, and the ongoing redevelopment program remain key contributors to the success and will continue to be drivers of growth well into the future.

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

Thanks, Paul. Operating FFO was $106.2 million or $0.29 per share for the third quarter. Including nonoperating items, FFO for the quarter was $110.8 million or $0.31 per share. Nonoperating items primarily consisted of non-cash gains on sales.

The third quarter marked another period of robust transactional activity on both the acquisition and disposition front. As this management team has articulated and executed on for the past five years, upgrading the quality of DDR's portfolio through active portfolio management is a top priority and was again on display.

We closed on the acquisition of seven power centers from existing joint venture with Blackstone for $377 million. The portfolio consists primarily of power centers for the grocery component located in Los Angeles, San Diego, Portland, Washington DC, Cincinnati, and Harrisburg, and is representative of our continued ability to source high-quality assets off markets that meet our investment criteria in terms of the NOI growth profile.

Significant opportunity within the seven asset portfolio remains as the current leased rate is 100 basis points below our company average with the majority of the vacancy contained in three junior anchor boxes in prime assets that we are in advanced discussions to fill.

Our relationship with our partners at Blackstone remains very strong and the seamless execution and favorable outcome for both parties was evident in the execution of the buyout of our second joint venture including the redemption of our $30 million of preferred equity.

The transaction represents the culmination of BRE DDR Retail Holdings' two joint venture, and we are pleased with the progress thus far on the sale progress of 22 other properties that represent the entirety of two lower quality joint ventures that we expect to close on by year-end.

As we have mentioned at length, we remain focused on reducing the number of joint ventures in an effort to simplify our structured continue to upgrade the quality of our portfolio. The acquisition activity this quarter was primarily financed through asset sale proceeds, most notably, from the disposition of a three asset portfolio in Salt Lake City for $223 million.

Our decision to exit Salt Lake City was the result of our determination that the pricing environment yielded an attractive opportunity to exit a market deemed non-core by DDR. Also in the third quarter, we closed on the sale of our final land parcel in Russia for $9 million, further simplifying the DDR story by completing the exit of all markets outside of North America.

Year to date and inclusive of the recently announced closing of the 71 assets with Blackstone from ARCP, DDR has sold or is under contract to sell approximately $1.3 billion of assets while reinvesting in approximately $1.1 billion of acquisitions and preferred equity. The 2014 activity thus far positions us in line with our most recent transactional guidance that forecasted DDR as a net seller of assets for the year although with much higher volume of activity than originally forecasted.

I would also like to address this quarter's debt-to-EBITDA calculation as well as our broader view on risk management. Third-quarter debt-to-EBITDA was 7.3 times on a consolidated basis and 7.7 times on a pro rata basis, up from last year and our first increase in many years. While that statement alone is inconsistent with our message of leverage and risk reduction, it is important to note that the $377 million acquisition from Blackstone closed on September 30, adding the full debt load to our calculation but with no EBITDA contribution for the quarter. This is simply a timing issue that will be remedied in the fourth quarter calculation when the EBITDA shows up.

More broadly, we continue to expect to reduce debt-to-EBITDA but our primary focus is on the Company's overall risk profile. And so transactions such as this quarter's attractively priced acquisition of prime centers or last quarter's sale of Sonae Sierra Brazil can continue to be pursued for their contribution to risk reduction rather than the slight setback to a continued debt-to-EBITDA reduction.

As we head into the fourth quarter, we would like to take this time to update 2014 guidance by tightening the operating FFO range from $1.14 to $1.18 per share to $1.15 to $1.17 per share. Consistent with our normal practice, we will provide 2015 guidance at the beginning of January. Finally, we would like to remind everyone of our property tour and dinner in Atlanta on Tuesday, November 4, the day prior to NAREIT. Thank you to everyone who has RSVP'd thus far.

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

Thanks, David. And before turning the call over to the operator, I like to briefly reiterate the strength and consistency of our operating results for the third quarter. For the 22nd consecutive quarter, we leased over 2 million square feet resulting in a steady increase in our portfolio leased rate through each of those 22 quarters. And for the 10th consecutive quarter, we generated same-store NOI growth of greater than 3%.

Our leasing spreads this quarter were the highest we've seen since prerecession and the current supply demand dynamic indicates a continued, favorable operating environment for retail landlords with high quality power centers and the platform that is equipped to take advantage of the opportunities present in today's market.

Our Project Accelerate initiative is generating exciting results and we're optimistic about the prospects for continued growth and success of that program.

At this point, Mark, we will take questions from our callers. Thank you.

(Operator Instructions) Craig Schmidt, Bank of America.

Thank you, I just wanted to get possibly an update on The Pike and Paseo Colorado and possibly may be some understanding -- are there special people to lease what is a little bit different audience at those projects versus your power center lineups?

Yes, Craig, this is Paul. Let me answer the latter part first. Yes, our leasing team, a couple of people devoted to these two projects entirely. Obviously, they're massive projects unique in our portfolio -- as well as consultants who are our best in class and well known in the business and the type of retailers we will be looking to attract.

As we have announced in The Pike, we're going to formally rename it the Outlets at the Pike and it will be an outlet center. So, we are dealing with a outlet consultant which is very typical of the outlet business.

We're making great progress in both projects. In The Pike, we've recently signed Nike outlet and H & M, and we've got some other big signings in the near future that we will be announcing. We opened a Restoration outlet, Restoration Hardware outlet last fall and have just signed an expansion of that unit. The business is through the roof for those guys. So making great progress, and we'll be keeping everybody up to date with press releases and other disclosures on that one.

Paseo same story -- we're making great progress. We acquired the Macy's department store building a couple of years ago, which was a big first step. They were underperforming, holding back the project, a great location, great asset in downtown Pasadena. And we are proceeding with hotel deal and some other deals. Again, can't announce all of them because we haven't signed tenants, but the progress is significant and, again, we've got people focused on those two projects exclusively.

Alex Goldfarb, Sandler O'Neill.

Just a question on fast fashion. Obviously, a hot topic, if you will -- no pun intended, obviously, but a hot topic with the Primark/Sears deal. Do you think that we should -- the malls have certainly gotten a lot of attention out of this, especially because Sears seems to be getting the headlines. But should we expect more fast fashion, Primark's and those folks to show up at the power centers? It would seem if some of these retailers want large GLA footprints that the malls is a little tough in the sense that you need a productive mall but with a sort of underperforming anchor versus the power centers the drive huge amount of sales and would seem to have the optionality and the square footage that some of these guys want. So if you could just tell us what you guys are seeing?

Well, I think it's pretty clear that the interest in power centers from fast fashion is there. One of the problems we have, obviously, is we've a very high occupancy rate just like the A-mall business is a very high occupancy rate. So the opportunities for fast fashion to penetrate either one of those has to be extraordinarily creative, which is whether it be through Primark-Sears or whether it through our Project Accelerate and things of that nature.

I think overall you going to see the growth of retail is going to go where there's opportunity and where there's availability. As we focus on the future of some of the boxes, not just in our centers but in the mall businesses well, I think the fast fashion retailers are going to have to be very nimble, and they're going to have to adapt to whatever opportunities are available to them if they're going to grow market share, particularly since new product is not being built.

So, as a practical matter, we've conversations with these folks on a regular basis. We've done deals -- Paul just mentioned we just did the Forever 21 Red deal at the Pike and we will continue to pursue fast fashion retailers where opportunities present, but they are having to be much more nimble and much more agile than simply resting on the laurels of a prototype that they think it's easily deliverable across the country because nothing is easily deliverable today.

Christy McElroy, Citi.

Dan, thanks for your opening comments. We wish you well on your next step. And while we recognize that you're not running the process, what are you doing as the CEO to keep the organization and your people laser focused during this period of uncertainty. And what are your expectations for timing of a replacement announcement?

Thank you for your comments, Christy. I can assure you that what I'm doing and what we're all doing is the same thing we've done for the last 15 years I've been here, which is we've come to work every day and we work hard and we run the Company the way we think we ought to run it in order to meet the -- fulfill the obligations and the expectations of our investors and our employees.

While there's uncertainty for sure in the market -- and there's a lot more chatter about it in the market than even there is here at corporate -- people are coming to work; they're working hard, as you can see by the results in the quarter and the momentum the Company has. No one is taking time off and no one certainly feeling sorry for themself one way or the other. Everyone is coming to work and working very hard.

As CEO, it's my job to make sure that everyone does that for as long as I'm here. In regard to the timing expectations, that's very much up in the air. I'm very committed to making sure we have a smooth transition with the next leader of this Company and that's something that's extraordinarily important, I think, and an obligation I have not just to our shareholders but to the employees of this Company and I'll fulfill that. So the timing of the search is unknown to me, but I am committed to running the Company for as long as I'm in the seat and I'm also committed to helping with a smooth transition at the appropriate time.

Todd Thomas, KeyBanc Capital Markets.

Question, in terms of acquisitions, Dan, sounds like there are a lot of consolidation opportunities out there. You said that they should be pursued aggressively. What's DDR's appetite today based on what you're seeing out the market and with where pricing is and sort of the level of competition for higher-quality product

And then as we think about DDR's investments going forward, should we expect to see more joint venture partnerships like the ARCP portfolio deal or more one-offs? What's the preference?

Well, as a practical matter, you should assume that will be aggressive in pursuing a number of the opportunities that we've identified, but a number of those aren't for sale. People aren't selling the assets. It's incredibly fragmented; there's a lot of private owners. These are not the hands of institutions or even other public companies for that matter.

And the competition can be stiff when there's a bid or an auction. And very often particularly when we bid up against nontraded REITs, we'll lose for obvious reasons. But if we are able to strike relationships with owners of assets that we have interest in or we're able to provide tax efficient transactions which some other folks cannot do, obviously, which the REIT structure enables us to do, we are a very viable and, I think, attractive buyer for those that are interested in selling.

So our folks are very focused on it. Our acquisition team knows exactly which assets we're interested in and the markets that we want to do business in. And we are reaching out to those -- the owners of those assets on a regular basis.

Pricing is tough, and one of the reasons why we're going direct to these folks is because we trying not to be in an auction process. An auction process does not serve this Company well, and I think our success in our hit rate will be very low if we get into an auction process, given our cost of capital and our disciplined compared to the cost of capital and others and their discipline.

In regard to --

Final point about that -- the ARCP transaction. I think that was a unique one both in its size and the way it came about. And so, I think was one that made sense to do in joint venture because of the nature of the portfolio, the size of the portfolio, and the way that the deal came together. But I think in general for what Dan is talking about in terms of the detailed work we're doing to figure out what we would want to target over the next many years, I think our general focus would be owning the majority of those on balance sheet in a wholly owned fashion.

In certain circumstances where we can't get that level of involvement initially, I think you have seen us work very well with Blackstone to step into 100% ownership of the highly attractive centers even if it takes a multiyear process in some circumstances. And so, I think the ultimate goal is wholly owned, but selectively you will see us use very carefully certain high-quality joint venture partners.

Paul Morgan, MLV.

You have talked in the past about how -- you know, when people ask about the cap rate spread between your acquisitions and your dispositions that it might be nearer than you might think because of land sales and on the acquisition side may be preferred equity deals at higher yields. All of that has kind of happened in the past quarter.

So maybe just have an update on -- if you look back on the year to date how do we think about the spread between the investment yields and the disposition cap rate and whether -- how we think about that going forward?

Sure. And it has been a significant change over the past few years from that extreme time during the downturn of selling pen cap assets and repaying the line of credit at 1% or 2% and a massive spread there. Today where at a very, very different point where we can execute on a continued portfolio improvement and a continued portfolio and capital recycling plan without even near-term dilution. So, we think it certainly the long-term decision, but the drawback at times is the near-term dilution associated with that.

Today, with the quality of the assets we're selling, where it's no longer primarily non-prime assets, it's prime assets that we either think have greater risk in some circumstances or lower growth then other circumstances, but we are selling to a much more institutional crowd of buyers at much more institutional sort of pricing.

And so, I think where the most significant changes happened is on the cap rate on our sales that have gotten significantly lower over the past few years. And today where consistently executing in this 7% or low 7% cap rate range for sales.

And while the auction market for acquisitions is not affording deals anymore close to that pricing, I think our careful focus on off-market acquisitions has gotten us to a point where we've been able to execute on the acquisition of very high quality centers anywhere from the low 6's to the mid-to-high 7's in some cases with a blended average probably in the mid-6's may be 6.5% to 6.75%, and so I think with that you look at an extremely small spread between disposition cap rates of assets that we don't want to own and acquisition cap rates that represent exactly where we want to put capital.

You layer in a couple land sales -- we mentioned the $9 million out of Russia, a couple of other little land sales and all of a sudden you're at a point where you're fully funding your acquisition activity in a fashion that is completely neutral to near-term earnings, and we think very helpful to the long-term growth rate of NOI for this portfolio.

Rich Moore, RBC Capital Markets.

First of all, Dan, we're certainly going to miss you, and good luck in your next phase, whenever that actually starts.

Thank you, Rich.

You guys are picking up a lot of developments, a lot of acquisitions. At least you had mentioned on the last call dispositions would probably wind down by the end of next year. And I'm curious, are you going to kind of stall out here on the progress on the balance sheet as you have more investment opportunities and maybe fewer ways to fund those?

Absolutely not. There is a continued extreme focus on overall risk reduction at the Company and that certainly includes further deleveraging. I think as noted in the comments that I made earlier, regarding the specific debt-to-EBITDA calculation, I think you'd certainly saw numbers that could indicate a stall out on that process for this quarter, but when you think about closing nearly a $400 million transaction at the very end of the quarter when it was funded with dispositions earlier in the quarter, you put yourself in a position where at least a quarter point of debt-to-EBITDA was shown higher than what a normal run rate pro forma for a full quarter of that activity would have shown. So, I think were cognizant of the fact that the debt-to-EBITDA result for the quarter showed a stall out, but I think that absolutely will be improved in the fourth quarter and beyond.

We continue to be a net seller of assets, which provides additional capital, even with the development and redevelopment pipeline that continues to find several attractive projects a year and would not say that were done with the disposition process. I think we are done with the disposition process for non-prime assets, but at this point either reset the bar or you just think about it more from a portfolio management standpoint of there's always going to be a bottom 5% to 10% of the portfolio. So, I think there continues to be a new and, in fact, higher-quality pool of disposition candidates to fund all of our acquisition activity and other investment activity.

And so, I think we have positioned ourselves -- we're very comfortable with funding our investment activity over the next couple of years. And in addition to that, we continue to have one of the absolute lowest payout ratios in this sector. And so, the amount of free cash flow that we have access to on an annual basis is much more significant than peers to fund an additional portion of that activity or an additional amount of deleveraging on an annual basis.

Haendel St. Juste, Morgan Stanley.

So, we saw an article a few weeks back, noting how Walmart is shifting its incremental development spend -- new stores away from big stores and will invest more in e-commerce as fewer shoppers head to their physical stores. A strategic shift not too different than what Target, I believe, is doing. I'd love to hear thoughts about the future of space demand implications for power center landlords like yourself. And do you think Walmart and Target are early adopters of the format that other large box operators will eventually adopt as well?

I wouldn't start by saying Walmart and Target are stopping with any kind of growth plans in the bigger space. A couple of different stories there.

Target has some things to figure out, right, whether it's Canada and in their overall business. And they're a creature of power centers, shopping centers, and there haven't been a lot built as we have talked about the past six years and they were driving that growth and hence they are not a part of what's being built today.

Walmart is still aggressively going after physical space in terms of their Neighborhood Markets, which they upped the count, and every time they talk about it, they increase the amount of Neighborhood Markets they're looking to deliver as well as some of their convenience stores and more urban environment stores, which obviously you need to build smaller to get some of the urban markets.

You also have to remember that both of these have large store counts in the Supercenters or the SuperTargets already. So where they're going to go with that new program is difficult and hence the move to a smaller format.

The good news, as we talk about everybody moving to more of an omni-channel approach, is these guys have a lot of capital. Target is a great example of a company that's got a tremendous amount of capital to spend on that approach. Since they are not building 120 new stores they were five or six years ago. All good for their business and all good for our shopping centers.

I think the other thing to add here and it's important to keep in mind is that as landlords would benefit greatly by tenants taking less square footage. We talked about it many times on this call, and we've encouraged many of our tenants to take less square footage, because sales per square foot, inventory turn, and profit per square foot all go up when you have less square footage.

And from a practical standpoint, when we're dealing with tenants on new concepts, whether it be Kohl's with their 35,000 square-foot concept or whether it be Walmart with Neighborhood Market or the CityTarget concepts -- it's all good news for bricks-and-mortar retail because retailers are being smarter, I think, about how they use their square footage, what their production should be on a per square foot basis. And that will lead to a healthier company all together. There's nothing really worse than dead space in a store, and we can walk through stores today -- and I'm sure we've all done that -- where we see a lack of inventory, where we see inventory spread out in a way (technical difficulty) attractive to the consumer, because there's just simply too much square footage.

So, we're encouraging our folks to take less square footage primarily because we have lots of users for that square footage. So, I don't think our shopping centers will get smaller even if our anchor tenants take less square footage because we have more concepts coming into the power center universe that we would like to accommodate, which will lead to a much more diverse merchandise mix which will help grow market share.

So, we're encouraged by the dialogue about space. It's an important dialogue that should be had -- e-commerce or not, it's important dialogue that retailers need to have on a regular basis, and we think it's very positive that that dialogue is occurring.

Ki Bin Kim, SunTrust Robinson Humphrey.

Thanks, just a quick question on leasing. If I look at your end of 2013 supplemental heading into 2014, it seems like the small shop, rent per square foot was close -- expiring, small shop rents per square foot was close to $28. And now if I look at your supp looking -- heading into 2015, your expiring rents are around $21.80 or so.

And I know you just can't draw that line from point A to point B, but I was just wondering if you could provide some more color on how much -- what we can expect from leased spreads going into 2015 and is this delta -- how much of it is a mix issue versus a favorable vintage issue?

Well, the biggest issue and the difference between 2013 and today's disclosure is simply the exclusion of Brazil in today's numbers. I don't know the exact impact, but it's significant and we certainly have not gone backwards on the average base rents in any size.

Our smallest size of less than 5,000, these really average over $30 a foot and if you look at under 10,000, it's $23. But every category is growing, and we continue to see it. Additionally, you have to look at a change in the asset makeup, right? They're always going to be sales and dispositions and acquisitions. So that's going to change it slightly. But again, I think just the biggest thing to look at was Brazil came out -- that drove that number down. But you'll see that growth consistently on a quarter-by-quarter basis.

Vincent Chao, Deutsche Bank.

Just wanted to go back to the investment environment here, comments about strong demand from new concepts and some of the fast fashion. You've got a couple of new developments the pipeline here that I know we had talked about for a little while. Just curious what we should expect in 2015. Can we see some additional starts coming on? It looks like Chicago you've got a fair amount of space. I know you've got the project there already, but it looks like that's close to being completed here.

Yes, we've got quite a bit on our plate, Vincent. You know other than project we just announced, is completing or bringing to a close Seabrook; Marion, Kansas; The Maxwell. We're going to commence a second phase of Belgate either next year or early 2016. We've got the ones we're just kicking off in Connecticut and Florida, Guilford and Lee Vista. So that's quite a bit on our plate. All good news. You know most of those other than Belgate and The Maxwell, these were on sites -- land that we've been holding for some time. Market conditions are right, tenant demand is right, so we're proceeding with them. It's been a great level of activity as I see it over the past two years and over the next year and a half or two years.

We'll continue -- we been very consistent and disciplined with our approach on the new ground up development. As Dan has stated many times, we're not going to go out and control sites, buy sites that need to be entitled, that are going to take several years to accomplish that process, accomplish the -- ascertaining the level of retailer interest. We get a lot of opportunities thrown at us every day and we look at them carefully, but, again, very selective.

So I think you can feel good about what we have in our immediate pipeline and that we will continue to surface other opportunities, but it's going to be the right ones and it is going to be where we can step in, use our leasing and development expertise, and execute quickly.

Steve Sakwa, ISI Group.

I guess I wanted to follow-up on the question about just kind of releasing spreads. And Paul, as you sort of look out into next year, I don't know what percentage of your 2015 leasing would have been put to bed today, but just how do you feel about kind of where market rents are versus the expiring rents and do you think that that number is similar or perhaps even higher in 2015 versus 2014?

Two different categories, Steve, right? On the renewals, listen, I'm -- we're thrilled with that 8.2% pro rata spread for this quarter. Again, the largest in 26 quarters. That won't move a lot. If we can keep that north of 8%, get it approaching 10%, has been the goal. That's a great accomplishment.

On the new deal spread, I feel great. Now 23% in the quarter is a big number, and there's no automatic that it just continues to grow from there. But if we can achieve somewhere in that midteens to mid 20s, obviously there is going to be some outliers in terms of quarter-by-quarter performance, but I see no reason why we shouldn't continue to see these outside new deal spreads and renewal spreads in the high-single digits. I know we pound this one every time we talk, but that supply and demand dynamic is working well for us.

We continue through initiatives like the Project Accelerate to encourage and motivate our team to create vacancy because that's what we're seeing. A lot of those deals in this quarter, by the way, that drove that 23% new deal spread were within the Project Accelerate initiative.

Tayo Okusanya, Jefferies.

Dan, I just wanted to add my own comments about how you will be missed. And I guess just going back to the whole change in management. The press release did come out, some of us have had the opportunity to have private conversations. But I guess for those investors that have not really had a chance yet to fully understand this or are struggling with it, Dan, could you just kind of let us know once and for all exactly why this was the right time for this decision to be made in regards to the management transition at DDR, and what that process involved to come up with the mutual decision?

Well, I think as every good company -- we've been talking at DDR about succession planning for quite some time. That's been no secret to the market and the Board has done an excellent job in making sure that management is very focused on it that's why we built the team that we have built. The conversations between the management team in general and the Board have been consistent. We feel that the Company is in terrific shape. I don't think there is a time that in the past five years I felt better about this Company than I do right now. I feel better about our asset class, I feel better about our management team, better about our balance sheet. This is a time where this Company is not only built for the current environment, but I think it's also built to take a punch if the market turns little bit.

So, we just felt that this was a stable company that is an industry leader in a lot of areas and the time was right for us to move on to other opportunities. And the five-year plan that we put together has been has been pretty well accomplished. If you really look at those of you who were at our 2009 Investor Day and you heard about what we talked about doing, and if you look at what we've accomplished, we've pretty well done that.

So, we haven't been successful with everything, don't get me wrong, but we've accomplished a lot. And I think it's time for new leadership and both the Board and I agree that it's time for a new leadership to take this Company through the next five-year strategic plan. So that was the conversation. It was a good conversation. I think the process is a professional one, and I will be very supportive throughout.

Jeremy Metz, UBS Securities.

Can you just talk a little bit more about how the process works with the deals you just bought from Blackstone this quarter? Did you go to them or they come to you, and just what the spread was between the yield you guys bought in and where you think the market for those assets is today?

Sure, this was originally a portfolio that actually Blackstone had tied up a year and a half ago or so. It was in a not ideally structured joint venture and Blackstone was able to tie up the portfolio at a very attractive price -- would have been something that at that time we would have been happy to buy the entirety of, but to their great credit and deal sourcing ability, Blackstone was the one that brought us this transaction.

And so we entered into it initially in joint venture with them, both ran it and underwrote it during that first year of ownership. Made good progress on leasing, but only a year later I think Blackstone was very pleased that they'd achieved returns that they were interested in recognizing. We were in a position where because of the lumpy nature of the Brazil sale, the lumpy nature of the Salt Lake City sale as well as a heck of a lot of other dispositions on top of that that we had lined up that we did have both the capital and the interest in acquiring high-quality assets.

These are generally sort of assets, especially the majority of the portfolio which represents coastal assets, Portland, San Diego, LA, Washington DC. We bid on this stuff all the time and don't even make it to the second round. And so, we were pleased for a portfolio that we knew well, where we were certainly paying a premium relative to what the joint venture had purchased it at a year prior by about 75 basis points. So going from about a 7.75% to a 6.5%. So certainly acknowledged and where are well aware that we are paying a premium to what the venture had paid only a year and change prior, but also thought that sort of mid-6% pricing on an NOI stream that we knew very well was quite attractive for a portfolio of assets where I think the great coastal stuff would price comfortably inside of that. And even the Cincinnati and Harrisburg assets are very attractive.

So I think Blackstone did incredibly well during their year of ownership or a year and change of ownership, but I think that pricing at which were getting these assets positions us very strongly to get a good initial yield to redeploy capital from non-prime asset sales and to position ourselves in a very low-risk way to generate strong NOI growth from these assets over the next many years.

Jason White, Green Street Advisors.

I was just wondering on your call last quarter you talked about the yields for your two new junior developments in Orlando and New Haven. I want to say between 8% and 8.5% was the range. Can you give us an idea of what those yields would be if you include the land costs and potentially if there were impairments taken perhaps on the original land costs?

Let me start with the -- they're both north of 8% on an incremental cost, Jason, and they would be closer to 6% on an all in. I'll turn it to David on the --

Yes, you've got around $20 million per developments in original land costs. That's what gets left out of that incremental investment side of it. There were not impairments taken on these projects just the typical quarterly process we go through to think about impairment analysis and for wholly owned developments. The hurdle of the undiscounted future cash flows for projects that we expect to own for very long period of time did not either force or allow us to take impairments on that land. And so, you've got in our total basis of what will come online late next year, you do have that land costs. But for purposes of us thinking about returns, the numbers that we have offered are on an incremental basis.

Michael Mueller, JPMorgan.

On the operating side, wondering what do you see as ceilings at this point for the leased and the occupied rates for the portfolio?

At some point, Michael, they should both get to -- it's a similar number. But I would tell you we talk internally about 96.5%, but I would never put the ceiling there. As we continue to improve the quality of the assets themselves, we could move that north of that. So, again, we talk internally about a near-term goal, if you will, of 96.5%, which puts us at historical highs for full occupancy. But I honestly believe we can get north of that just based on the transformation of the quality as we disposed of some of the non-prime and buy some prime and prime plus assets.

I would tell you one of the other things you have to watch as we talk about a strong volume of deals, a lot of that is not even going to move the needle because we're talking about space that is currently leased that we may be signing a lease with a new replacement tenant, Project Accelerate being a great example of that scenario. So, we can continue to improve the quality of the tenant mix the credit quality of the tenants while not even moving the needle on the occupancy rate.

Chris Lucas, Capital One Securities.

Just a follow-up kind of question on comments made earlier related to encouraging tenants to take less space. I guess I'm wondering about specifically in either Kmart, Sears, or an Office Depot, whether you are seeing their ability to execute on a rational real estate program. Are you seeing that happening now? Has there been any change over the last six months or so in their ability to move forward with that plan?

Not so much in a downsizing. Sears in the mall story is a little different than us right as we talk about the Primark example earlier, but we've seen some closings of Kmart or [stuff] where we've gone after through our Project Accelerate where it makes sense for those guys to leave a market or reduce their store base in any multi-store market. Depot was obviously a big part of Project Accelerate to date, and we think they will continue to be. And that rationalization is going to happen in terms of store account not necessarily in downsizing, why we would encourage downsizings with all of the office supplies, Depot and Staples.

And there's other examples we've used over several quarters' worth of calls where we talked about Best Buy and others that we were very anxious to get space back, work closely with them. That never really happened. We had a couple of smaller examples, but on a large scale we haven't been able to get these guys to downsize.

That's going to change, though, over time. Now, we have the merger complete between Depot and Max. They are clearly in the midst of figuring out exactly where they need to be and how big they need to be, so there will be continued opportunities. I would tell you, though, in that category, I would expect that we would get more back in their entirety -- again, all good news for us rather than downsizings in place.

The other thing to keep in mind in regard to downsizing is it's really not a real estate decision, even though we sit in this room and all we talk about his real estate. But it's a merchandising decision. And what happens is as people like Depot and others tried to figure out what it is they are going to be there going to be going forward, how they're going to merchandise their store, what product are they going to carry, How are they going to present it, et cetera. That all has to be done first and once that's done you can then back into a size that makes sense.

But the big mistake retailers would be making and a lot of made over the past and people are more sensitive to it now is sizing their store and then filling it. You don't want to size the store and then fill it. You want to figure out what you are going to fill it with first and then back into the size. So as you see a lot of these retailers who are struggling and working hard to figure out what their merchandise mix is going to be going forward, that will ultimately dictate the size of the store. And obviously, we will be here ready, willing, and able to work with those retailers once they've decided who they're going to be, how are they going to be relevant, and how they're going to merchandise their stores.

Andrew Rosivach, Goldman Sachs.

Good morning. This is Caitlin Burrows. I just have one quick question on the redevelopment at San Juan, Plaza del Sol. It looks like the spend was significantly reduced between the second quarter and third quarter. So I was just wondering what was the reason for this? Is there any sign of retailer reticence to go to the island, or is it just some has been completed so there's less to go still?

It's a pretty simple answer. We decided to break those down into two distinct phases and phase 1, which are completing right now, is the number you see in the supplement. When we commence with phase 2, which still is our plan, we will show that as an additional redevelopment. In terms of interest, I mean even with a softness in sales on the island, what we're seeing in leased rate was flat for the quarter. Base rent was up for the quarter, and the list we're seeing of US-based national retailers who are interested in the island. Dan mentioned also in his script from the Investor Day -- they announced that they are aggressively looking at the island for a major portfolio of stores, which fits well into our transformation down there and redevelopment down there. But the simple answer, again, to the lower numbers that we split into a distinct phase 1 and phase 2 redevelopment.

And as we talked about before, the trouble -- the significant challenge to create new supply on the island is something that did prompt us to think about the two pieces of the project separately. The first one being the internal redevelopment that we had control of, the second one being the true expansion where we are more dependent on an entitlement process that I think is one that's advancing well, but it's one of the themes we consistently talk to you about why retail continues to be so good on the island. They make it really hard to build new projects. And so for us, we separated the two phases of this -- one that was underway and completely under our control, and one that represents the expansion.

Ki Bin Kim, SunTrust Robinson Humphrey.

Thanks for taking my second question. Just a quick one. And I just got this question a few times over the past month, so I just want to relay that to you and sorry to put you on the spot, Paul Freddo. But I think people are -- have a lot of questions regarding what maybe your personal plans are following Dan's departure. Does that have any incremental impact on your thinking about (technical difficulty) DDR or what you want to do just going forward?

No, Dan's departure has no bearing on that whatsoever. Right now, I'm under contract through 2015, and these are discussions we'll have.

I would now like to turn the call over to CEO Dan Hurwitz for final remarks. Please proceed.

Once again, I just want to thank each of you for joining us this morning, and we look forward to seeing you at NAREIT.

Ladies and gentlemen, thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.