Site Centers Corp (SITC) 2014 Q4 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the fourth-quarter 2014 DDR earnings conference call. My name is Katina, and I will be your coordinator for today. (Operator Instructions)

As a reminder, this conference will is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Meghan Finneran, Financial Analyst. Please proceed.

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

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 the 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 in the documents that we filed with the SEC, including our 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 any additional questions, please rejoin the queue. At this time it is my pleasure to introduce our President and CEO, David Oakes.

Thank you, Meghan. Good morning and thank you for joining us today. I'd like to start off by addressing the announcement released yesterday morning indicating that I will become the next Chief Executive Officer of this Firm. There are a few constituents that I would like to address prior to discussing the fourth-quarter results.

First, I am pleased with the Board decision and appreciate their confidence in me and this management team and the shareholder value that we can create. I would also like to thank the investors and analysts on this call to have shown this team an extraordinary amount of support in the past few months. Next, I would also like to thank our outgoing CEO, Dan Hurwitz, for his significant contribution in positioning this Company where it is today.

Finally, I would like to thank the employees of DDR. While the past months of uncertainty have not always been easy, the people in this organization have remained loyal and have continued to perform like the top-notch professionals that they are. I look forward to working with them and taking this Company to the next level in the coming years.

I would now like to address the quarterly and annual results. For the fourth quarter, operating FFO was $112.2 million or $0.31 per share. Including nonoperating items, FFO the quarter was $80.9 million or $0.22 per share. Nonoperating items primarily consisted of non-cash impairment charges on nonoperating assets.

For the full year, operating FFO was $420.4 million or $1.16 per share, representing a 5% increase over the prior year. In the past four years we have grown FFO per share at a compound annual rate of over 6%, despite selling over $2 billion of low-quality assets and significantly lowering leverage.

In January we released information on a number of announcements that I would like to briefly mention. First, we closed on the sale of 41 shopping centers and 7 land parcels in the fourth quarter for $258 million for DDR's share, bringing the full-year total to 82 operating asset sales and 16 land parcels for over $1.2 billion of dispositions at our share.

During 2014 we also closed on the acquisition of 83 shopping centers for $1.1 billion at DDR's share. As we have previously outlined, we felt that the frothy transactional market's signaling that we should accelerate the disposition of nonprime and low prime assets at attractive pricing, which led us to be a net seller for the first time in four years.

Our Firm's management platform also made significant progress in the fourth quarter. Consistent with our plan to wind down smaller, lower-asset-quality joint ventures and expand relationships with fewer partners on higher-quality assets, we wound down two joint ventures totaling 23 properties during the quarter while closing the 70-property $1.9 billion acquisition of the ARCP portfolio with Blackstone.

While we have formed three joint ventures over the past four years with Blackstone, we have concurrently wound down 12 joint ventures. As outlined in our investor presentation, our portfolio transformation has been the most dramatic in the sector over the past five years, and we are hearing the end of the low-quality asset bucket.

As we close the books on 2014, we now have only 32 wholly-owned nonprime assets, most of which we are either marketing for sale or that we intend to sell over the next two years. The portfolio is in its best shape in its history, although that certainly does not mean that the improvement is done. Our top 112 wholly-owned assets -- as defined by future growth profile, location, sales, and credit -- comprise approximately 75% of our gross asset value.

And based on recent transactional costs for similar assets, generally in the 5% to 6.5% cap rate range, our portfolio quality and Company net asset value becomes much clearer. Additionally, we continue to maintain proprietary pipeline of nearly $1 billion of potential acquisitions in our latest Blackstone joint venture, which boasts some of the top coastal power centers in the country.

On the capital markets side, we issued $500 million of 10-year unsecured notes in January at a 3.625% coupon. The proceeds will be used to pay down our $300 million and $50 million unsecured term loans, currently at a floating rate in the low 3% range; while the remainder will be used in May to retire the $153 million of 5.5% unsecured notes coming due.

With over 425 that $425 million of mortgage debt and $350 million of convertible debentures maturing in the second half of 2015, we intend to opportunistically access the unsecured bond market again this year. And we'll also consider restructuring our unsecured term loans at a rate more attractive than those currently outstanding -- and with a longer duration.

I would also like to spend a brief moment discussing our 1.75% convertible notes maturing in November of this year. Our current 2015 guidance range includes the impact of approximately 6 million common, unrestricted shares to be issued on November 20. It is our current intention to settle the principal of the notes in cash, and any premium attributed to the conversion in shares by giving notice to the bondholders on October 6.

For modeling purposes, the GAAP interest expense on the notes is 5.25%, which would also be eliminated on November 20. However, prior to November of 2015, if our stock price close at a value greater than 125% of the conversion price for 20 of the last 30 trading days in a quarter, holders of these notes may exercise their conversion rights in the subsequent quarter. The current price to trigger the holders' rights is $18.56 per share and adjusts downward as we pay our common dividend. Therefore we are now assuming the full diluted impact of the shares for the last three quarters of this year.

And the final modeling item I would like to address is on snowfall expenses in the fourth quarter and our expectation for the first quarter of 2015. The November snowstorm in Western New York caused a number of properties to incur abnormally large expenses relating to removing snow from the roofs of shopping centers. As rooftop snow removal is not considered common area by many anchor tenants, we assumed a recovery percentage of approximately 25% of the roughly $1 million of snow removal expenses related to that storm, all of which was incurred in the fourth quarter.

The blizzard in January that impacted the New England region will also impact our recoveries in the first quarter. However, we estimate the total expense to be approximately $500,000, with a similar recovery percentage. With that, I will turn it over to Paul for his remarks on operations in the retail environment.

Thank you, David. Before I begin, I would like to take a moment to congratulate David and to mention the enthusiasm with which this announcement has been met here at DDR. As most of you know, I was personally very supportive of David throughout this process. And I know I speak for my team as well as the entire organization in saying that we are thrilled with the Board's decision and anxious to support David as he leads DDR in this next phase.

The momentum we experienced during the first three quarters of 2014 continued throughout the fourth quarter, and we are extremely proud of our team for the strong results delivered in the quarter and for the full year. In the fourth quarter we completed 327 new deals and renewals for 1.8 million square feet. Our leased rate improved by 10 basis points sequentially and 70 basis points year over year to 95.7%. This is our highest leased rate in 27 quarters, or since the first quarter of 2008.

For the fourth quarter we achieved a pro rata new deal spread of 25%, a positive pro rata renewal spread of 7.2%, and a combined pro rata spread of 11.9%. Our new deal spread of 25% represents the highest spread in 10 quarters, or since the second quarter of 2012. When combined, new deal and renewal volume for 2014 represented the highest volume in DDR's history for the US and Puerto Rico, showing the continued strength and quality of our portfolio.

We are confident that we will build on our recent successes and deliver a leased rate increase of 25 to 50 basis points in 2015, consistent with our guidance. More importantly, we are projecting same-store NOI growth of 2.5% to 3% despite this leased rate of nearly 96%. We have consistently reached or exceeded 3% same-store NOI growth for the last 11 consecutive quarters, which is a testament to the quality of our portfolio and the strength of our operational team.

One additional metric I would like to share with you is our renewal volume. Total renewal volume reached a historic high in 2014 at 7.8 million square feet. The renewal success we continue to have is directly attributable to the quality of our portfolio combined with the continued landlord-friendly supply-and-demand dynamic we are operating within. We have mentioned on several calls that we fully expected renewal rates to stabilize in the mid- to high single digits, and this continues to play out.

As discussed in our supplement, renewals required minimal to no CapEx and require no downtime, resulting in enhanced portfolio economics without significant investment. During the quarter we achieved a renewal retention rate of 90%, above our historical average of 80% to 85%. And we expect renewal spreads to remain in the high single-digit range for the foreseeable future.

It is worth noting that 31% of our total leases by GLA will expire by the end of 2017, with 18% of those leases being naked. Included in this number are 572 leases on space greater than 10,000 square feet, with 75 of those leases being naked. These naked leases provide us with tremendous opportunities to capitalize on the current leasing environment by growing rent at attractive spreads and improving tenant mix. I can assure you that our leasing team is laser-focused on making the most of the opportunity in front of us, and we will continue to execute effectively.

As you are all aware, last week RadioShack filed for bankruptcy; and Staples announced that it would acquire Office Depot. From our perspective both announcements were anticipated and good news. With regards to RadioShack, the company accounts for only 113,000 square feet of space throughout our portfolio. Proactively preparing for this inevitable bankruptcy filing long before it actually happened has put us in a great position to backfill the space with quality retailers or to utilize the space to accommodate expansions for existing tenants within our centers.

Our leasing team has done a fantastic job of pre-marketing RadioShack space, and we have found there to be significant interest from a number of retailers. We look forward to re-leasing RadioShack space to market-share-winning retailers in addition to enhancing the credit profile of our portfolio.

Moving on to the Staples and Office Depot merger: with 36 Staples locations and 57 Office Depot locations in our portfolio, we were analyzing the potential impact of this merger long before any announcement was made. I am sure you are familiar with our Project Accelerate initiative, and Office Depot has been one of the high-priority tenants that we have had significant dialogue with over the last year regarding lease terminations and the recapture of space.

Both Office Depot and Staples occupy quality space within our prime shopping center portfolio, and gaining control of these locations will not only allow us to positively comp existing rents and enhance the merchandise mix of our centers, but we will also be in a position to collect termination fees for high-demand space that we are anxious to get back. Similar to the initial merger between Office Depot and OfficeMax, this process will take some time to finalize. And we again expect this merger, if approved, to have a positive impact on our portfolio, both qualitatively and quantitatively.

The bottom line is that market-share-winning retailers like Nordstrom Rack, T.J. Maxx, Bed Bath & Beyond, Ross, Sprouts, Ulta, and Five Below continue to grow aggressively. New supply of power centers remains constrained, and we view these and similar situations as great opportunities to generate growth.

I'll now turn to call back over to David.

Thanks, Paul. I would like to conclude by walking you through our previously-announced 2015 operating FFO guidance. The midpoint of the outlined range of $1.20 to $1.25 per share represents a growth rate of 6%, above the peer average and in line with our average growth rate over the past four years. The FFO range, in conjunction with the recently announced 11% dividend increase to an annualized $0.69 per share, should provide for a total shareholder return profile of between 7% and 11% current pricing.

On the operational front we are forecasting same-store NOI growth of 2.5% to 3%, a midpoint below what we achieved in 2014 but reflective of the high-quality portfolio of power centers that is approaching full occupancy of approximately 97% in the next 18 to 24 months. Growth components include approximately 125 basis points from rent bumps, 75 basis points from renewal spreads, and 50 to 100 basis points of positive net absorption from new leasing.

Given the extremely favorable supply-and-demand dynamic in our sector and our dramatically improved portfolio quality, leasing spreads should continue in line or slightly above what DDR achieved in 2014. We also expect to bring online approximately $200 million of ground-up development and redevelopment, including approximately $100 million from legacy developments -- notably in Guilford, Connecticut; Orlando, Florida; and Seabrook, New Hampshire, just north of Boston.

The vast majority of what will be placed in service will be in the fourth quarter at incremental yields in the mid- to high single digits. We also intend to bring online over 30 redevelopment projects totaling over $100 million, with the majority coming from our full-scale redevelopment projects in Long Beach, California, and in the eastern submarket of Columbus, Ohio. Redevelopment NOI will also be back-half weighted, with yields of approximately 10% on a stabilized basis.

Finally, on the transaction front, we are coming off a very robust 2014 and intend to continue the dramatic portfolio optimization as we reach the final steps of eliminating nonprime assets. We are budgeting for our net neutral transaction activity to include the continued sale of nonprime and prime-minus assets in a mid-7% cap rate and a comparable amount of acquisitions at a total spread of approximately 100 basis points.

While we currently have $159 million of dispositions closed or under contract thus far in the first quarter, the acquisitions environment remains incredibly competitive. And we will not compromise on our return or asset quality thresholds for purposes of FFO -- and, to that end, forecast the bulk of the acquisition activity will be back-end weighted.

At this point I will turn the call over to the operator, and we will begin to take your questions.

(Operator Instructions) Christy McElroy, Citi.

David, can you comment on what, if any, changes you plan to make internally as CEO -- whether relating to strategy, operations, G&A, etc.? And I'm wondering if you have already begun the process of backfilling the CFO role; and whether you are looking internally, externally, or both?

Sure. The mandate as CFO -- or as CEO is a very recent one. So I think I can say a few things, but not overly inclined to go into too grades of detail at this very early point.

One, I think what we've accomplished at DDR over the past several years has been very significant and has worked very well. I think the portfolio upgrade, the balance sheet upgrade, the management team changes and upgrade have all been very significant. And I think that that has positioned us well for everything that we can accomplish going forward.

I had obviously worked closely with Dan on strategic matters for a number of years and certainly support very significantly the direction we've gone. So I think for us, it's: how do we take the next several steps in that direction to get to blue-chip status? I think there are steps on the portfolio side that continue to be out there, dramatically less dilutive than what we've done in the past.

But I do think that there is continued progress to be made, both on the portfolio and the balance sheet. I do think we have the opportunity to execute at an even higher level than what we've executed at to date. And so -- excited as the new team gets together with the formal mandate to best position this company as we look out over the next several quarters and, much more importantly, over the next several years.

I also think we are much more focused on showing you what we can do than telling you what we can do. So I'm excited to put that on display as -- again, as we look out over the next few quarters to years. As for the CFO, we have an incredibly strong finance and accounting team here and no concerns about the depth of that bench. Somewhat it was timing-related issues with the Board's formal decision position on the CEO, and trying to make sure we could get that out before earnings, insomuch as the importance of that mandate and wanting to make sure that it got its own attention. So we do expect to fill that role internally in the very near term, and we will be in touch in the next several weeks regarding that.

Ross Nussbaum, UBS.

Good morning and congratulations.

Thank you, Ross.

Let me see if I can tackle Christy's question slightly differently. I think during the CEO search process, it kind of felt like there were a lot of whispers coming -- either true or false -- from around the DDR circle that perhaps the Board was looking for someone who would consider a change in strategic direction, and that your predecessor was unwilling to be open to such a significant potential strategic change.

So I guess the question is just that, which is: in your being named the CEO of the Company, is this the Board saying that they want you to take the Company into a more diverse place, like grocery-anchored shopping centers or urban retail; or stick with what the game plan has been the past few years?

I will say a couple of things. Obviously cannot completely speak on behalf of the Board, but have a great opportunity to spend considerable time with them through this process, discussing aspects of that question. And I don't think, at least that I experienced, there was any formal push that there needed to be a strategic change.

I think the Board's focus was on finding the right person to lead this organization and trusting that that person and that team would execute well on the right strategy. So no formal push for change. But I think very prudently, during a time of transition, a Board that took the time to go through a comprehensive search and think about all of the options to best position shareholders for the near term, but even more so the long term.

So I really wasn't a party to the overwhelming majority of those discussions. I think I heard the same rumors that you did, but I think we are past that at this point. The current team has the mandate, and we are excited about what we can execute on with the great base of assets we have today -- but also, with some continued improvement in that asset base as we look forward over the next few years.

George Auerbach, Credit Suisse.

David, last year you sold $1 billion of assets and probably $700 million-plus, if you exclude Brazil. I know a lot of the heavy lifting is done in the portfolio refocus, but just given compressing cap rates for shopping centers across the country, how likely do you think it is that we will see you sell much, much more than the $250 million included in the guidance?

Yes, I think it's probably the greatest risk within that range -- not outside of that range, but within that range -- in our guidance is that the transaction market does continue to be quite strong, making dispositions easier and acquisitions more challenging. The good news is that means you are getting better pricing on those dispositions. The good news is that with the worst part of the portfolio gone, it oftentimes means we are selling better assets -- institutional-quality assets, although still at the lowest tier of our portfolio; but also, generally, larger assets.

So instead of selling a lot of $5 million assets to get up to $250 million, you do have some larger ones in there. So with $160 million roughly under contract or closed six weeks into the year, I think it feels likely, if today's pricing environment continues, that we would probably exceed that $250 million level -- not at the expense of our FFO guidance range -- but I think as one mitigant to getting to the high end or above that, just when we think about the opportunity to accelerate this portfolio optimization in an environment that's this strong.

On the other side of that, last year we had a few unique opportunities, particularly the ARCP portfolio, where we could redeploy capital in an off-market transaction where we thought pricing was attractive. So even though we dramatically accelerated the disposition volume in 2014, we also found a few unique opportunities on the acquisition side.

I don't know that we can find those again. But at this point last year, I had no clue that we could find them last year. So you should be sure that there is a team here working very aggressively on finding ways to redeploy that capital, but obviously keeping our discipline very high in terms of return thresholds and our discipline very high in terms of asset quality.

Samir Khanal, Evercore ISI.

David, good morning and congratulations from us, as well. I look at your lease spreads in the quarter, and it looks like they are approaching 12%. As we think about kind of the next 12 months, are these double-digit spreads sustainable? Or do you think at some point you have to moderate to kind of high-digit single digits?

I guess a lot of it will probably depend on kind of the new leases. But as renewals cap out at some point -- just trying to get a sense of what the blended spread would be on a run rate basis here?

Hi, Samir, this is Paul. I think those spreads are sustainable, certainly for the 12-month period you are talking about and probably beyond that. I don't want to go too far out with the changes that could happen in the macro, obviously.

But you hit it on the head. The renewal rates are strong, are going to stay in that, I'd say, 7% to 9% range, right? And then we should be able to sustain that as a run rate going forward.

You are going to see more bounce, if you will, in the new deal rate. We had a very, very strong quarter, obviously, with the 25% pro rata spread on the new deals. But they are still going to be out there. I would expect they are going to be in the mid-teens to the mid-20s. We are going to have some outlier deals that are very strong that are going to help prompt that. So that blended spread of low double digits is achievable for the foreseeable future.

Craig Schmidt, Bank of America.

Thanks. First, David, congratulations. My question is how should we think about DDR's relationship with Blackstone, given the Raider Hill partnership?

I think you should think of DDR's relationship with Blackstone as a very close one. Dan was absolutely an important part of that, as evidenced by his new firm's partnership with Blackstone. But there is an extraordinarily deep relationship with Blackstone, particularly through Luke Petherbridge, our head of Capital Markets, who has also been leading the efforts with our recent transactional activity with Blackstone.

So we've obviously worked very, very closely with Dan over the years. We've obviously worked very, very closely with Blackstone over the years. And so wouldn't expect any change to the very close nature of our relationship with them. Even forgetting personalities for a second, both sides of this partnership have made a considerable amount of money in the two transactions that we've entered into that have been monetized, at least from a Blackstone perspective. And we are very encouraged by the early returns from our third venture together.

So I think more important than anything, financially this has worked extremely well. But beyond that, the organizations have worked very well together. And I would expect that that would continue.

Steve Sakwa, Evercore ISI.

I guess to go back to the kind of disposition acquisition, and kind of where to put the money -- and given the comment that you are going to be approaching 97% occupancy -- I'm just wondering where development plays a role here? I know that many of the larger boxes that historically drove the development are not as active today. But I'm just wondering, kind of as you look at landscape, can development play a more meaningful role over the next two to four years?

Steve, I'll start with my overall view and then talking for the entire sector. I don't think it's going to play a very meaningful role over the next several years. You hit the key point -- the Kohl's, the Targets, the Lowe's. These are the guys driving new power center/strip center development, and they are not making deals right now.

In terms of our portfolio, it's pretty exciting. We've got several underway. We are finishing up Seabrook, as you know, and really just getting going on a project in Orlando and in Guilford, Connecticut -- land we have held for some time.

We'll be starting a second phase down in Belgate, which was one of our new acquisitions down in Charlotte 1 1/2 years, two years ago. So we are going to continue to be opportunistic. We've looked -- most of our development has been focused on the legacy land, the best way to monetize the land as we look at it.

But we will keep our eyes and ears open, as we are presented with a lot of opportunities all the time. Obviously they are very difficult to make work, meaning new ground-up development. And we are not going to go out and buy and hold land, as -- which is going to have a long entitlement process or a long lead time in terms of soliciting retailer interest. So we'll continue to do it on a limited scale, the best way to monetize the land. And in terms of the entire sector, I don't see it being a significant factor for at least three to four years.

Todd Thomas, KeyBanc Capital Markets.

David, you talked about the balance sheet a bit; leverage has ticked up over the last couple of quarters as you have continued to recycle capital and assets. I was just curious what the current thinking here -- in terms of lowering leverage -- is from here. Do you feel this is sort of a comfortable level for the Company to operate at longer-term?

Yes. I'll address it in a couple of ways. To the last point, I absolutely believe it is a comfortable level in terms of very acceptable risk profile and appropriate place to be, even if the world got dramatically worse. That said, our leverage will go down as we look out over the next several quarters to the next several years.

I think we had outlined targets in the past. I am in complete agreement that the deleveraging was slower or even took pause in 2014, and you will not see that happen again this year. So while I have no discomfort where we sit today, you will see additional progress on that front.

I can't talk about this without broadening the topic to what we really focus on internally, which is risk. Leverage is one component of risk, and there are many others. And so when I think of 2014, if you ask me the question: did we significantly lower the risk of this Company? I would say, absolutely -- even though we did not significantly lower the leverage of this Company.

So I think that the exit of Brazil, particularly as we look at an exchange rate that is 20%, 25% wide of where we sold that -- even for a very good company down there, but one that did contain other risks for DDR as a US-dollar-denominated owner of that; as we have eliminated a number of joint ventures as we have significantly extended debt duration with our recent bond issuance; as we have eliminated a number of joint ventures; as we have eliminated over 80 nonprime or prime-minus affects last year, I have a long list of reasons I feel good that we significantly lowered risk last year. Even if we didn't lower leverage on a go-forward basis, you will see us lower risk and lower leverage.

Paul Morgan, MLV.

It's been a while since you came up with your prime asset definition. And David, you alluded to prime-minus and potential sales from there.

As you look at 2014, the experience in terms of the performance of the assets within the buckets that you created, are you seeing any shifts? Are there more centers that are becoming prime-minus or nonprime that would kind of be better viewed as sale candidates now? Or maybe there are centers going the other way because of improvements in market conditions? But is some of the demarcation that you came up with a couple of years ago, a few years ago now -- is it the way you see it today? Or would you raise or lower the bar as you think about 2015?

Yes, it's a good question, and it is something we focus on a lot. Because, honestly, I think the mindset has worked well. The performance of the assets has validated our rankings.

What's been the toughest part is the nomenclature. So we originally created prime and nonprime. We then expanded prime to prime-plus prime and prime-minus, in addition to nonprime. So we created more grades as we refined our portfolio management process -- effectively the re-underwriting in great detail and long-term budgeting of every asset we own through a department we created about two years ago.

And so I think while the nomenclature has gotten tougher, our focus on it has gotten even more significant in our ability to quantify in terms of a zero to 100 score for every asset has gotten dramatically more detailed and more significant and important in driving our transaction activity, both on the buy-side, see how new assets fit in, and on the sell-side, identifying exactly what the sale candidates are for this year and next year.

In the past it might have been a simple as just saying: here is the pool of clearly nonprime, noninstitutional assets that we have no business owning. I think today it's a much more quantifiable exercise and thoughtful exercise, as we've had to more clearly define what makes sense, either because of higher risk profile for lower growth profile, to not own going forward.

So we haven't rolled out the complete details, with the exception of a few property tours. We will show off the complete details of that analysis every once in a while, but obviously a proprietary analysis that we do internally that continues to raise the bar for average DDR quality; raise the bar also, then, for what we are selling.

So that's why we struggle at times with the question about -- is the portfolio transformation done? Yes. As we define the portfolio transformation, four to five years ago when we first outlined some of these terms, it is absolutely done. In fact, we've meaningfully exceeded what we planned. Are we done optimizing and improving this portfolio? Absolutely not.

So I think you will continue to see activity there, driven by this quantifiable portfolio management exercise that continues to identify the lowest-tier assets in terms of our ranking system for disposition over the coming year. And so that process will continue and intensify.

Alexander Goldfarb, Sandler O'Neill.

Good morning and congratulations, David. Just a question on FFO -- it's come up on a few of the different conference calls this quarter. If you look at what the Company has achieved in the past -- you know, since the downturn, huge strides. And yet the continued use of operating FFO sort of harkens back to the dark days, when there was a lot of stuff going on in the numbers.

For the most part, you guys have cleaned up; you know, the FFO has very little these days. Obviously, this quarter had one major item, but for the most part the numbers have gotten substantially cleaner. So do you think that DDR to start to just use the NAREIT definition, and lead with that, guide with that -- and obviously, point out the one-timers -- but get back towards the NAREIT definition as a way of demonstrating the transition that the Company has completed?

Yes. I think, number one, we have made massive strides in transparency over the past five years or so. And you will only see that continue as we go forward. The way we look at it is the small number of adjustments we make to get from NAREIT-defined FFO to operating FFO are justified by the fact that we truly believe that is the better way to understand the Company, its earnings power, and its growth over time.

That said, we disclose NAREIT-defined FFO. We talk about it. We think about it. There is clear reconciliation from EPS to NAREIT-defined FFO, and from that FFO to operating FFO per share. So we leave it to the analyst community and the investor community to pick what's most useful for them.

Definitely understand your point about not wanting companies manipulating numbers, wanting things apples-to-apples as often as possible. So I think we want the disclosure out there for that.

But when we do end up with one-off situations -- whether it's Dan's separation, payment that was expensed, or whether it's the write-down on a piece of Toronto land because Target pulled their multibillion-dollar Canada program off the table -- I do think those are unique one-time items that, at minimum, we'll highlight. And people can use NAREIT-defined FFO or operating FFO, and we are going to try to make it as clear as possible how to get between the two, and basically the way that we think is most useful to look at the Company, in terms of an appropriate number to a scribe a multiple to or associate a growth rate with.

Ki Bin Kim, SunTrust.

Congrats, David. So I think you bring a little bit of a unique perspective. You've been on the buy-side; you've been in the CFO role, now in the CEO role.

How do you internally think about balancing -- I know someone -- Steve Sakwa touched on it, but balancing financial leverage versus NAV per share or FFO per share? And I know you alluded to lowering leverage over time, but should we expect that to come from asset repositionings, recycling, or is equity more on the table now than it has been in the past

We think about all those concepts a lot, probably FFO per share least of those. That said, we absolutely understand the importance of growing that metric over time. Probably not on a quarterly basis, but on a much longer-term basis.

The question is constantly asked: how do we best position this Company to grow FFO per share over a very long period of time? And, certainly, how do we grow NAV per share on a regular basis?

You mentioned aspects of my background. I think the most interesting part of it is that me and a lot of other people here lived through one of the most significant blowups in this industry, in terms of what we lived through in late 2008 and early 2009. And that, I think, is what has impacted us the most. Those scars are deep; those are not forgotten.

So we will never lose sight of the risk profile of this Company. Even if another financial crisis of that magnitude is extraordinarily unlikely, we will never we sight of that. So I think that's what continues to drive the significant focus on risk management here.

I went through a lot of the ways that we significantly lowered risk last year. The one that's obviously somewhat missing is leverage reduction and defining a debt-to-EBITDA standpoint. I still think you are more likely to see leveraged reduction through EBITDA increases than simple debt reduction. I don't think there's a massively different view towards capital raising.

Equity is a portion of that. We've used it over the past several years many times, but we've obviously been sensitive to price. It hasn't been equity issuance at any price by any means. So I think it's constantly something that will be evaluated as part of that plan.

I'd also remind you we have, because of our relatively low dividend payout ratio, more free cash flow per share than any one of our competitors -- which we certainly think of as equity that is created every year. We obviously addressed the issue earlier of having more concern about dispositions being higher than acquisitions.

So I think while not equity, that is additional capital that comes in available for leverage reduction or any other purposes. So we continue to believe that there are considerable ways that we can lower leverage, either by debt reduction for by EBITDA increase. And equity issuance is one of those levers.

Jim Sullivan, Cowen Group.

Maybe just to take another stab at the issue of external growth outside of acquisitions -- I know Steve asked a question about this earlier, and Ross implied a question, I guess, about grocer-anchored centers. But given that power center -- ground-up power center development is not going to -- you don't expect it to be likely for another couple of years, and I'm assuming it's not likely because potential anchor tenants are not willing to pay the rents that are required to generate an acceptable return -- when you think about the external growth alternatives other than acquisitions, that leaves you with redevelopments; and you have some of those, and potentially you are going to expand that menu. But one of the possibilities, of course, is doing smaller infill centers or grocer-anchored centers.

Some of your peers are ramping up that development pipeline. So I'm just curious what your appetite is to increase the redevelopment pipeline as a percentage of the total external spend, as well as possibly doing some grocer-anchored products?

Yes. A lot of questions in that, Jim. First, on the development side, I don't know that it's so much when I talk about some of the larger anchors, the discounters, the department stores; it's not a function of not willing to pay the rents to make ground-up development pencil. They are not doing deals.

Target is going to six their business domestically. That's very clear. They are going to do a handful of deals, the majority of those being express or urban, and not going to be some fields we are going to play in unless they fit into one of our centers.

I'll touch on the grocery-anchored concept, too, and David can follow up. It's just not something -- you know, we've worked our way out of a lot of the grocery-anchored centers heavily reliant on small-shop space. We've talked about the shop space in the power center sector. Our portfolio -- it's a much higher quality shop space. We still have some cleanup to do through lease-up and through dispositions, but it's not an area right now that we're thinking -- but not that we would rule anything out, but not thinking about jumping into that business, as we are seeing Regency do in a pretty big way.

Redevelopment is clearly a focus. That continues to be a robust program. We spent over $125 million last year and brought about the same number of different projects -- obviously, because they are not just calendar-year projects -- but brought about the same amount into service throughout the year.

In 2015 we are going to spend somewhere under $150 million, hopefully bring in, between that and developments, about $200 million, as David mentioned in his script. That is a program we are continuing to roll out. We review every asset within the portfolio regularly in terms of what opportunities are out there that we haven't identified yet.

And there is still a big pipeline in that redevelopment. I see that going on for the next several years, where we can spend and bring in somewhere between $100 million and $150 million a year at those much more risk-adverse returns north of 10. It's definitely a different type of project than development. It comes with a lot less risk. You own the asset; you know what's going on; easier to entitle, etc. So that will be the focus as we are going forward.

Jim, the exact question you ask is one that we ask internally, and Paul and I discuss quite a bit, is where we should be allocating capital within these projects. I think, exactly this Paul outlined clearly today, redevelopment is the focus. And we are not seeing many opportunities elsewhere.

Lines are blurring, and so you are seeing many, many more of our projects -- including our new development in Guilford, Connecticut -- that is grocery-anchored, but still much more of the power center sort of focus in terms of when you look at who we are going to place beside the Fresh Market that's going there.

Vincent Chao, Deutsche Bank.

David, just wanted to go back to your comments about sharing Dan's vision and generally being in agreement and in line. Obviously, that's been very successful for you guys over the years. Just curious if you could comment on some areas where maybe you didn't agree with Dan as closely?

Dan and I worked very closely, especially for the last five years, but really for the entire eight years that I've been here. And so I think aspects of the strategy are both his, and mine, and Paul's, and a broader group of industry experts that we solicited to make sure that we were on the right page.

And so I don't think there are any massive differences in opinion in terms of strategic direction that we disagreed on in terms of anything major. So I'm excited to have the formal mandate to run the organization and excited to show you exactly how well we think we can execute on most of the strategy you have seen and some additional items over the next, hopefully, many years.

Carol Kemple, Hilliard Lyons.

Congratulations, David.

Thank you very much.

Can you go over the details of the convertible notes that you talked about earlier -- just exactly what's included in guidance?

Yes, absolutely. This for originally an issuance -- what we thought of as, obviously, a convertible security, more complicated than straight equity or straight debt, I do think we've realized from a final conversion process and from an accounting process is actually more complicated than even we had bargained for, particularly when the security is in the money.

So at this point it's a $350 million principal security with a conversion feature. The cash interest rate that we pay is one .75%. The gaps interest rate that we pay is 1.75%. The GAAP interest rate at which we expense the interest is closer to 5.25%. So we have considerable, effectively, phantom interest that is currently being expensed and will be expensed, until we call this note for redemption in the fourth quarter of this year.

So the good news about that refinance of the $350 million of principal is that right now -- and I certainly think likely by the end of the year -- we should be able to refinance that $350 million of principal at a rate comfortably inside that 5.25% rate that is expensed in our earnings. The aspect of the security that has not historically shown up in results has been the dilutive nature of the conversion feature.

At this point the notes are in the money to the tune of about 6 million shares that would be issued as part of our calling of these notes in the fourth quarter. And so we will start to reflect the dilutive of nature of those securities for the third -- for the final three quarters of this year, those will be reflected in our diluted share counts. So we'll still be expensing the higher interest expense as well as the additional shares, even though they are not yet outstanding. So there is a negative impact to our 2015 results due to this security, even if it doesn't in fact convert and get refinanced until the fourth quarter.

Tayo Okusanya, Jefferies.

Let me also add my congratulations, as well. Very well deserved.

Thank you.

In regards to the asset sales this quarter, could you just give us a sense again of the cap rates on those transactions and a general sense of the quality of those assets, just as we kind of try to understand what's left in regard to lower-quality assets that could still be on the block for sale?

Yes. We went through a little bit of the detail in the call, getting down to only 32 wholly-owned nonprime assets remaining. So I think you can see how much that pie is shrinking relative to 300-plus of those, 400-plus of those only a few years ago.

When you think about the transaction activity in the fourth quarter, it was a wholly-owned basis spread across country; generally small to midsized assets, looking at a range of probably $5 million up to as high as $40 million to build up to that $600 million gross amount, which is $258 million at DDR's share. We also had two portfolio sales that were the liquidation of two of our joint ventures for $150 million and $170 million.

So all of that aggregated up into that $600 million of total sales volume at a mid- to high 7% cap rate range. I think the sort of product that we are looking to sell in 2015 is a notch higher than that. And you are looking at a pricing environment that seems to only be getting stronger. And so we would expect that cap rate range for 2015 sales to be somewhat lower.

And so we are encouraged by the activity that we continue to have on the disposition front. You are absolutely right to know there is less and less nonprime product out there; but then the definition just becomes: what's still the lowest 5% to 10% on the quality perspective or on the quality spectrum in this portfolio? And that's what the focus is for 2015 sales. So you will continue to see us active, probably in the mid-7% cap rate range for the year, and selling assets in the, again, in the probably $10 million to $30 million range, with a few that might be a little larger than that.

Haendel St. Juste, Morgan Stanley.

Congratulations from me as well.

Thank you.

So one quick clarification before I ask my question. Just wanted to go back to an earlier question -- it sounded -- I just wanted to make sure -- that the current guidance does not contemplate incremental CFO or CIO costs?

Current guidance includes the company that we were sort of mandated to have, looking back a couple of months ago when we first came out of that -- whether the expectation that we would have me and we would have a CEO -- so notionally Dan's run rate sort of compensation. Today we are not adding that additional CEO. So I think that does create some G&A benefit for us, even with some compensation changes for internal people moving into the CEO and CFO roles.

Okay. Got that. And my question is on your overall small-shop occupancy. In aggregate you guys are at 92.5% now, up from 91.3% last quarter. Have you maxed out the opportunity there?

And then if you could also comment on demand for the space that is sub-5,000 square feet, where the occupancy is 86.5%? How would you assess the demand for that size space? Where do you think you could take that segment of your portfolio occupancy up to? And then any incremental capital that might be required to do so?

Yes, Haendel, the 92.5% you quoted is really on that 5,000 to 10,000 feet; and as you mentioned, the less than 5,000 is 86.5%. Opportunities in both. So the combined for everything under 10,000, which I know is the way a lot of our peers quote it, is at 88.7%.

We have talked in the past and still believe we can get that combined -- everything under 10,000, so the zero to 5,000 and the 5,000 to 10,000 -- to 92%. So we've got the benefit of 300-plus basis points.

Demand is good. And we are doing it in a lot of ways, too. We are consolidating shop space; we've seen several deals where we have combined two, or three, or four of these units for an Ulta, or a Five Below, or a PetSmart. And that's something we will continue to do as we get away from the smallest of shop space.

The biggest percentage of the zero to 5,000 is going to be in some of the grocery-anchored stuff, some of the stuff that you are going to see on disposition lists. But again, the demand is good. We are seeing -- we are not as mom-and-pop-centric, I think, as some of our peers -- again, based on some of the character of our centers. We are going to see more franchisees, more of the service providers. Seeing a lot of food demand.

But we've still got room to run, again, as we try to get that zero to 10,000 up to a combined 92%, which is at 88.7%. If you are looking at comparative supplements, too, you've got to remember that in year-end 2013, we've had some -- we had Brazil in that number. So I feel pretty good about what we did over the course of the year. We were up 80 basis points just on the quarter. The supp doesn't show -- it shows it 10 basis points down year over year, but that included Brazil in the year-end 2013 number.

So the progress is good. The demand is good. You will see us reduce the overall percentage of our GLA devoted to that smaller size. But you'll see us get that leased rate up over 90% over the next couple of years.

Jason White, Green Street Advisors.

Just wondering, as you look back over the last two, three, four years of acquisitions and how they performed relative to your underwriting, is there anything that you plan on tweaking in your underwriting process to maybe target assets that you might feel are going to perform better than perhaps your underwriting would have suggested?

It's been a major focus for us, especially after -- you know, through the crisis -- completely taking a few years off and barely even reviewing acquisition opportunities, because the capital wasn't there for it. So as we got back into that business probably four years ago, as we started to outline the power center thesis, probably three years ago as a mispriced asset, we have been very active on that front.

We've done the few large portfolio deals, mostly from joint ventures, so assets we knew well. So I'll sort of exclude that from this analysis. And outside of that, it's been the ARCP deal and a lot of one-off transactions. I would say in general the assets have performed better than our underwriting.

There's going to be three reasons behind that. One, plugging them into our platform, we always find a few additional opportunities; two, the overall macro environment has continued to get better, which I think is important; and three, maybe most important and most controllably, I do think we've taken a cautious view to underwriting. It's why we lose the overwhelming majority of assets that we bid on, because we are cautious in our underwriting. You know us, and you know the way that we think about retailers.

That doesn't mean that we think every office supply store is going away, and we underwrite that space at zero. But it does mean that we take a cautious view on underwriting, and we are not filling everything up completely in the next few months. I think we've got reasonable lead time, capital costs, everything else, that go into that. So I think for those various reasons, we have generally seen acquisitions outperform our expectations, given the volume that have been joint venture acquisitions. I think there it's a simpler case, where we already knew them.

But even on third-party deals, we've generally seem them exceed our expectations. Going forward, our acquisition focus I think becomes even more intense as we look to the quality of land in terms of defining overall locational qualities. So retailer is very important. Market overall, very important. But specific submarket and specific dirt that we are sitting on, I think, is something that at times, looking at the long history of DDR, we hadn't been as focused on as we should have.

And as we look forward, I think that becomes even more important for us. Certainly doesn't mean that we will be competing with the overwhelming majority of capital in the world that exclusively looks at five or six coastal markets for acquisitions. I do think there are a lot more places that we can make money, and that our tenants can make money, than simply those five or six markets.

They will be a place that we will certainly look for opportunities. But if we think returns are better, and market and dirt quality is extremely good, you can certainly see us look at a broader list of top 40 or 50 MSAs, not just top five or top six. So I think we will just continue to refine that focus more going forward.

Chris Lucas, Capital One Securities.

Just a quick question on the -- David, you had mentioned before a little bit about the blurring of concepts as grocery starts to get into the larger-format centers. I guess I was curious as to what your thoughts are as to any cap rate differential for large-format centers that have, and then those that don't have, a grocery component? And if you could quantify that cap rate differential?

Yes, I think it's a good question. It's certainly a case-by-case basis, but I think overall we'd say there's at least a 25 basis point benefit to adding a grocer to a power center -- whether that's a traditional grocer; whether that's the addition of considerable food that's driving traffic to a Walmart, or a Target, or a Costco; or whether it's the actual addition of a box, like a Sprouts or a Fresh Market, into an existing power center.

I think you are seeing an immediate sort of 25 basis points -- maybe even at the larger than that, maybe 50 basis points -- benefit to the cap rate. So I think an important focus for us is making sure that we do have that grocery component as part of the merchandise mix, but also very important as we think of terminal value of a center.

Jeff Donnelly, Wells Fargo.

David, you had a few questions on external growth. I actually have a question on internal growth. At DDR's investor day back in 2013, I think you guys had given a five-year same-store NOI outlook of 2.5% to 3.5% growth rate. Since that time I think you have paced around 3%; and looking forward, I think you guys are guiding to 2.5% to 3% -- towards the lower end of that outlook, when I would have thought that growth would be have been more front-end loaded.

Is that a function of industry conditions or timing? Or just knowing what you know now, would you maybe have guided to a slightly lower range than you guys did back then?

Yes, I certainly don't think anything has gotten worse in the environment. I absolutely don't think anything has gotten worse within the portfolio. So, honestly, I would continue to be very supportive of thinking about that 2.5% to 3.5% range that we articulated a few years ago.

So we have executed on some of that probably a little better than the midpoint of that range and think that we should be able to be around the midpoint as we look out over the next few years. Obviously, we will try to push hard to exceed that. But obviously we would rather show you that over the coming quarters and years than tell you about it.

Christy McElroy, Citi.

It's Michael Bilerman. I personally think it was your time on the sell-side that was the most important and defining of your career.

Absolutely.

I did have a question on G&A. I know you talked a little bit about sort of backfilling the CEO and CFO roles internally, and maybe there's a slight positive there relative to existing comp ranges that are in G&A. But maybe just more broadly, I think there has been some discussion or scuttle around the marketplace that at north of $80 million, that DDR's G&A levels were too high or have been too high.

And I guess as both in the prior CFO role and in the CEO role, do you agree with that or not? Is there a material level that you could see in terms of savings, if you are going to manage the Company either the same or differently than it was being run before?

Yes, I think if you look at it from pure ratio standpoint for the handful of folks that either run the whole universe or some subset as G&A as a percentage of revenue, as a percentage of market cap, I think we generally screen very well in terms of a reasonable compensation structure, especially for a company that's performed relatively well.

So I don't think there is a problem where anyone is banging on the door, saying, you have to run this more efficiently. But I do think with any transition -- and this obviously being a significant one -- there is an opportunity to evaluate the organization's structure, the G&A load. So we are absolutely embarking on that and hope that we will be able to find some opportunities to run more efficiently.

I think there are two aspects of that. I mean, there's the one side of that that is the simple G&A savings that we can hopefully generate -- I mean, some of it very obvious, by not replacing Dan. So I think that's clear. And hopefully we can locate some other savings.

And I think overall, though, the greater focus is just how can we run the Company as efficiently as possible? Constant recognition that we work for shareholders -- it's their capital that we are spending on anything, and it's their returns that we are tasked to generate.

So, again, very early to answer this question. We've lived inside of here, and we've got some views on it. But -- and I think we see some opportunity, but it will take us some time to figure out exactly what that opportunity is. Again, it's not the penny-wise/pound-foolish stuff. It's how do we most efficiently operate this Company for shareholders? So your question is a good one, in that it is very reasonable to assume that that is a considerable focus now that this team has the mandate.

With no further questions at this time, I would now like to turn to call back to President and CEO, David Oakes. Please proceed.

Thank you all very much for your time and for your support of this team through this process. And we look forward to many, many more of these. Thank you. Have a nice day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.