SITE Centers Corp. (SITC) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 DDR Corp. Earnings Conference Call. My name is Jasmine, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now like to turn the presentation over to your host for today, Mr. Samir Khanal, Senior Director of Investor Relations. You may proceed.

Good morning, and thanks for joining us. On today's call you will hear from President and CEO, Dan Hurwitz; Senior Executive Vice President of Leasing and Development, Paul Freddo; and Chief Financial Officer, 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 those statements are subject to risks and uncertainties and actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties that could cause actual results to differ may be found in the press release issued yesterday and filed with the SEC on Form 8-K and in our Form 10-K for the year ended December 31, 2011 and filed with the SEC. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release issued yesterday. This release and our quarterly financial supplement are available on our website at www.ddr.com. [Operator Instructions] At this time, it's my pleasure to introduce our CEO, Dan Hurwitz.

Thank you, Samir. Good morning and thank you for joining us. We continue to be very pleased with our operating results, performance of our platform, sales results and growth aspirations of our retail partners and the receptivity we continue to receive from the capital markets. All factors, when combined, continue to provide consistent performance, long-term value creation and a simplified story that continues to enjoy a very positive momentum. Paul and David will provide you with more details in a moment, but suffice it to say we are very pleased with our progress and remained firmly committed to the strategic objectives that we have articulated to the market over the past few years. The strategy is working and we have no reason to doubt its continued success. Undesirable assets are being sold; quality assets are being bought; vacancy is being leased and occupancy rates continue to grow with improved credit quality of cash flows; projects are being redeveloped, providing new store opportunities for our retail partners; access to capital is abundant as leverage metrics continue to improve and our maturity profile continues to expand; and NAV continues to grow as financial engineering and short-term FFO focus continues to become a distant memory. So overall, we are very pleased and see continued runway for continued positive results moving forward. Before turning the call over to Paul I'd, like to share with you one observation that I have noticed over the past few months as I have traveled to meet with many of you through the non-deal roadshow process. Whether it's folks trying to grab catchy headlines at the expense of actual retail operating results or individuals attempting to paint a specific business with an inappropriately broadbrush, it's important to keep in mind that the success of our tenants is completely dependent on the merchandising presented to the consumer by our retailers and the receptivity that, that consumer has to the inventory contained in the store. While many attempt to link the issues of our retailer like Best Buy with the fate of other junior anchor retailers, it's important to keep in mind that comparing the market conditions of a Best Buy to the market conditions of a T.J. Maxx or Bed Bath & Beyond, for example, is equal to comparing the results of Sears to that of a department store such as Macy's. There simply is no link. These are vastly different companies with vastly different strategies, different merchandising expertise and therefore, vastly different results. There is no broad generalization that one can make intelligently about merchandising except the obvious conclusion that great merchants win and bad merchants lose. And since we live in a world with great transparency, guessing and sweeping generalization is simply not necessary. The future of the department store is not linked to the fate of a struggling company, no differently than the future of a junior anchor is linked to the fate of a struggling co-tenant, especially when they consistently trade in different merchandise at a different price point. The numbers are what they are. That is why retailers that operate side-by-side in the same asset consistently show vastly different results. It's not primarily about the real estate and it's not primarily about the box. It's what's inside the box that matters and will ultimately determine the success or failure of a retail concept. It's not about whether you operate in a mall, outlet center, power center or grocery anchored neighborhood center, it's about the merchandise you present to the consumer as a merchant whose primary task is to distribute the right goods, at the right time, at the right price. Clearly, certain retail asset classes are better suited for some retailers over others. That is why some of us have unique proprietary relationships with our top tenants. And quality real estate absolutely enhances the opportunity to succeed. However, if you are a lousy merchant in the best Simon mall or outlet center or a lousy merchant in the best regency or federal neighborhood center or a lousy merchant in the best DDR power center, the real estate will not bail you out. We have seen this play out time and time again since the inception of the shopping center, and this fact will not change. Retailers win on product and not on just location, marketing, public relations and image campaigns. While those aspects are important as part of the business, they will not prevail if they drive consumers into the store for a consistently disappointing experience. Again, that is why you see vacancy in assets at superior locations with enviable overall sales productivity and we also see surprising structural vacancy at the most celebrated and well-managed portfolios that produce the highest sales per square foot results in all of retail. The real estate provides the opportunity for sure, but clearly not all retailers are successful in capitalizing. So as retailers in every asset class are forced to retool their merchandising strategy to adjust to the changing needs and demands of the consumer, it is important to keep in mind that effort is very individual and makes almost no statement about the visibility of the asset class in general. Some will adapt and some will disappear. Either speaks directly to the retailer merchandising strategy, the response to competition and the confidence of the corporate merchant group. At the end of the day, while there are many aspects of the retail business that must be considered, none is more important than the merchandising strategy of the individual retailer and the consumer acceptance or rejection of the inventory contained within the 4 walls of the box, whether that box is 2,000 square feet or 200,000 square feet. As you think of the challenging business headlines for every retail segment, whether at certain department stores, at particular junior anchor, grocer or even mom-and-pop results, keep in mind that retail is an intensely competitive, unprotected business. Good ideas today are employed by your competitors tomorrow. But strong competition breeds excellence for those well-prepared and talented enough to respond. So like the retail real estate business, platform matters for retailers as well, and ultimately, the merchandising strategy of the platform will determine the fate of an operator over time regardless of what may be happening in the space next door. I'll now turn the call over to Paul.

Thank you, Dan. Today I want to call attention to one aspect of our re-leasing results that speaks volumes about the operational performance of our platform, and that is the positive trends we are experiencing within our lease renewal results. It's easy for these results to be overshadowed by the variety of good news being generated by our portfolio, but renewals make the strongest and most economically meaningful statement about existing sales, productivity, profitability and asset quality. In Q1, we had a record volume of renewals with 367 deals, representing 2.3 million square feet of space. This number is approximately 20% higher than the quarterly square foot average we achieved in 2011, which in and of itself was a record year. This success is directly attributable to the quality of our portfolio combined with the landlord-friendly supply/demand dynamic. Our results also highlight the fact that retailers are increasingly unwilling to lose an irreplaceable store at a prime asset. Economically, we executed these renewals at a 5.4% rental increase on a cash basis and more importantly, on a pro rata basis to spread gross to 5.9%. Similarly, first quarter new deals were executed at a 6% rental increase. And on a pro rata basis, this spread is 300 basis points higher at 9%. These spreads are bolstered by our continued efforts to dispose of non-prime assets to enhance our overall portfolio quality. Clearly, this strategy has been a great success and we continue to enjoy the addition of positive metrics through the substraction of lesser quality assets. Importantly, this quarter's renewal metrics represent a continuation of positive renewal spread that dates back to the second quarter of 2010. Moreover, as our overall occupancy number continues to increase and the supply/demand metric continues to favor the landlord community, I fully expect renewal rates to stabilize in the mid- to high single digits going forward. As also disclosed in our supplement, renewals are achieved with little to no CapEx and require no downtime, so the economic impact of these transactions is even more meaningful as we are enhancing overall portfolio rental growth without buying the gain. As a result of strong overall first quarter activity, our lease rate as of March 31, was 93.7%. This represents a 10 basis point increase sequentially and a 110 basis point increase annually. This increase is particularly impactful as historically, we have seen an average decline in occupancy in the first quarter due to the seasonal nature of tenant fallout, lease expirations and limited commencements. It's also important to note that the first quarter stability is highly indicative of a vastly improved credit quality of cash flow and the strong credit profile of our key tenants. Going forward, we expect continued stability as our tenant watch list continues to be slim and dispositions, when coupled with recent acquisitions, additionally fortify that segment of our income stream. From a leasing perspective, we remain confident in our ability to maintain momentum throughout 2012 and we'll keep you posted on future occupancy guidance as the year progresses. In that regard, we will be attending RECon in Las Vegas in a few weeks where we will get additional color on the leasing environment for the remainder of 2012 and beyond. Since we meet with our tenants on a regular basis, we are rarely surprised by any news that comes out of RECon, but we are always inquisitive as we determine our role in the delivery of space for future retailer open-to-buys that are often discussed in detail at this show. As I'm sure many of you saw on our press release after the Best Buy store closing announcement, the impact to us was negligible. You may ask yourself why that was, and the answer is very simple: the stores that populate our centers make money, and that is the quintessential factor for a viable retailer making such a real estate decision. In that regard, you can also assume that the stores slated to close do not make money and the company would be more profitable without them. Interestingly, the decision to close had nothing to do with door size or how close to one of the coast the store was. Also not shocking to us, it had nothing to do with how many people reside in the 3-mile radius. In fact, the store closings announced included coveted markets such as New York City, Boston, Chicago, Los Angeles, San Francisco and D.C. Markets that many have paid and will continue to pay a premium to enter. Using a 7-mile range, those actual store closings had average populations of about 1.5 million people, with over $100,000 in average household income. While these numbers are staggeringly impressive, to Dan's earlier point, they do not guarantee success. That's 5 closed just 50 of their least profitable stores, and economics drove the decision, not demographics and not proximity to an ocean. Smart investment decisions are based on operating results and profitability driven by merchandising. And once again, great ammos and great real estate cannot bail out poor performance. Going forward, we are encouraged that Best Buy is pursuing a management change and hopefully, a revised merchandising strategy will not be far behind. But once again, this closure list proves that retail is a local business driven by local results and regardless of who occupies the space at any given time, the results can and will be dramatically different. This is why we stay close to our tenants, evaluate our real estate accordingly and do not become intoxicated with numbers that often have no bearing on future success. And finally, as Dan mentioned, there are winners and losers in the retail game of market share. If you haven't already read the note published on Monday by Adrianne Shapira, Managing Director and Retail Equity Analyst at Goldman Sachs, you should. Adrianne's note estimates the significant market share loss of J. C. Penney and points out who the obvious winners are in picking up that business, most of whom are value-oriented retailers and key tenants in our portfolio. This shift in market share goes well beyond this specific example. Over the past decade, we have seen a secular shift in the business, away from department stores to value-oriented retailers such as Ross; TJX, with its various concepts; Target; Bed Bath & Beyond; and others. As we all know, retail is a game of taking market share, and it's very reassuring to see our primary tenants capture the market share loss of a struggling competitor. And with that, I will now turn the call over to David.

Thanks, Paul. Operating FFO was $66.8 million, or $0.24 per share, for the first quarter. Including nonoperating items, FFO for the quarter was $59.7 million, or $0.21 per share. Nonoperating items were primarily lost on the retirement proportion of our 9 5/8% unsecured notes during the quarter. Operating results and operating FFO per share came in above our internal projections as reflected in our guidance for slower growth in the first half of 2012. We are pleased with our operating performance this quarter with pro rata same-store NOI growth of 2.3%, including approximately 2% growth in our domestic portfolio. And we continue to feel comfortable that these results will accelerate in each of the next 3 quarters of the year based upon the visible pipeline of signed leases. Over the last few years, you've seen us aggressively pursue opportunities to position DDR for above average long-term growth and net asset value while also lowering the company's risk profile and cost of capital. And we are very pleased with what we've been able to accomplish in that regard so far in 2012. Since the beginning of the year, we raised close to $700 million of capital comprised of nearly $320 million of equity and over $350 million of debt, with an average interest rate of 3.3% and term of 6.6 years. During the first 4 months of the year, we committed $340 million of investment in high-quality prime shopping centers, all of which will be funded with proceeds from equity issued and asset sale proceeds. Financing attractively priced acquisitions with equity and the proceeds of asset sales has allowed us to significantly grow our portfolio of unencumbered wholly-owned prime shopping centers. Our recently high-quality balance sheet acquisitions in Chicago, Portland and Phoenix were added to the unencumbered pool, further improving the size and quality of that portfolio. Today, our unencumbered pool consists of 193 shopping centers that generate approximately $300 million of NOI. During the first quarter, we substantially addressed all of our 2012 consolidated debt maturities. The debt capital I referred to earlier was used to retire $184 million of convertible notes that matured in March, reduced outstanding balances on our revolving credit facilities and effectively prefund all of our 2012 mortgage debt maturities. Remaining maturities consist of $223 million of unsecured notes maturing in October and $13 million of mortgage debt. And we have nearly full availability on our $815 million revolving credit facilities. We have no other unsecured bonds maturing in the next 3 years, further enhancing our flexibility. In March 31, our weighted average debt maturity was 4.5 years, a significant improvement from 2.9 years at the end of 2009 and continued progress from the 3.9 years at the end of 2010, 4.3 years at the end of 2011. Our annual maturities are very manageable, and we expect our cost of capital to continue to improve as well. Fitch upgraded our credit rating in January and S&P upgraded our outlook to positive in February. Our progress since then is lowered leverage and strength in our maturity profile. And we remain absolutely committed to lowering leverage further as we work to regain our consensus in investment grade ratings. With respect to unconsolidated debt maturities, our DDR TC venture has obtained commitments for the refinancing of the $540 million term loan and the $200 million revolving credit facility, and we expect to close those 3- to 5-year financings in the coming weeks. These transactions are direct the majority of our 2012 earnings consolidated maturities, and we are actively making progress on the remainder. In the first quarter, we generated gross proceeds of $45 million through asset sales. Included in these figures is $27 million from the sale of non-inc producing [non-income producing] assets, including our development site in Yaroslavl, 1 of 2 land assets [ph] in Russia. An additional $81 million of assets are currently under contract for sale, including $29 million of non-inc producing assets. Since 2010, DDR has disposed of $1.3 billion of primarily non-prime assets in secondary and tertiary markets. The non-prime assets sold were 72% leased, and average household incomes and populations within a 7-mile radius were approximately $69,000 and 239,000 people, respectively. In comparison, our $450 million of prime investments since 2011 were 96% leased, and average household incomes and populations were approximately $84,000 and 360,000 people, respectively. As you can see, through our capital recycling program, we've been able to significantly strengthen the quality of the portfolio from demographic credit quality of cash flow and long-term NOI growth and stability perspective. We are being very diligent in underwriting potential acquisitions and despite a competitive market, we are pleased to be finding select off-market opportunities. Since you probably noticed from our press release, we've raised the low-end of our 2012 guidance by $0.02 and now project operating FFO per share of $1 to $1.04 for the full year, up from the range of $0.98 to $1.04 originally provided in January. Strong operating results during the first 4 months of the year relative to budget combined with the volume of tenant closures below what we projected in the lower end of our range drove the change in our 2012 guidance. We continue to project same-store NOI growth of 2% to 3% for the year, with the majority of this growth in the back half of 2012, and we are pleased to be comfortable in raising our guidance at this time despite accelerated steps to improve portfolio and balance sheet quality. While EBITDA and NAV per share growth continue to be our focus, we are encouraged to guide to our first year of FFO per share growth in 5 years, and we expect this trend to continue. At this point operator, we would be happy to turn the call over for questions.

[Operator Instructions] And your first question will come from the line of Mr. Craig Smith with Bank of America.

Dan or Paul or whoever, I'm just wondering have the best power centers in the nation already been built? Are we kind of approaching some sort of maturity? And it seems like when development slowed it was more cyclical but as time passes, you start to think it may be somewhat systemic?

I think that's a great question, Craig, and I don't think we really know the answer to that. We know that there's not a lot of great power centers being built and I don't think there's going to be a lot being built going forward and certainly in the near future. I do think there's going to be additional opportunity over time because there are lifecycles to retail projects. As we see, all retail projects have a lifecycle, and there's going to be an opportunity to recycle some of those properties and with new formats, new merchandising strategies, new tenants, there is going to be an opportunity at some point for growth of development in our business. But I don't think it's going to happen anytime soon. And I think that as we continue to watch market share shift to the primary tenants and power centers that will beg the question of whether there should be additional external growth to accommodate that market share shift, and we're going to have to address that going forward. But I think we're going to start having that conversation a lot more in the next 12 months and the reason is, as 2012 open-to-buys, I think, are in good shape. 2013, I think we will find -- and when we talked to tenants in Vegas, are not in great shape. And certainly, 2014 are certainly not in great shape. And meeting open-to-buy requirements is going to put an awful lot of pressure on the retailer. What that actually does for development and whether that generates new opportunity, we'll have to wait and see. But it is definitely a topic that is going to be discussed thoroughly, and I think it's going to become a more substantial discussion in the next 12 months.

Your next question comes from the line of Christy McElroy with UBS.

I know this gets talked about every quarter and all of you guys have talked about getting a better sense for the leasing environment at ICSC, but just wanted to hear your updated thoughts. The lease to commence occupancy GAAP is at 200 basis points now, you've talked about the potential for that narrowing down to maybe 150 to 175 or have been, in the longer term backed down to a more normal [Audio Gap]. The leasing velocity's been good and the leased rate keeps increasing. So I'm wondering after another quarter of leasing embedded in your guidance, where do you see the company at yearend in terms of both the leased rate and the leased to occupancy GAAP? And David, you talked about higher same-store NOI growth sort of at the back half of the year, is that because of timing of lease commencement?

Christy this is Paul, and I'll start with the spread between the commenced and leased and the leased occupancy. We're comfortable 4 months into the year with our prior guidance of 100-basis-point improvement over yearend 2011 in occupancy, and it's still early. We don't want to get too far ahead of ourselves, so we're comfortable with that number. There might possibly be some adjustments as we close on the EDT Blackstone transaction later in the second quarter. But again, we're comfortable with the 100-basis-point improvement. In terms of the spread, you and I talked about this for many quarters now, it's -- we're in uncharted waters with the 200 basis points spread between commenced and leased rate, and it has to come down. It hasn't come down as quickly as we thought. It actually came down a little bit in the first quarter and part of that was fewer move outs and some activity in Brazil, but the fact is, it has to come down as we move closer and closer to a full occupancy number. But I wouldn't even venture a guess because we've been wrong before in terms of where that spread's going to be over the next few quarters. But it's, certainly, not going to get down to that historic rate of 50 to 100 basis points by the end of this year. We still have that spread, but it has to come down.

And on the back half of your question Christy, the higher same-store NOI growth later in the year. The direction of your question was exactly in line with the way we're looking at it and budgeting it. It's really mostly signed leases that commence later this year that drive that growth and on top of that, you're comping a period where we were getting back some blockbuster and border space in the back half of last year, so I think it's very strong results forecasted based on visible leasing, as well as a period where we did take a little bit of a hit late in fourth quarter. You saw that go into the first quarter, and we comfortably expect an acceleration in same-store NOI as we look out over the rest of the year.

Your next question will come from the line of Paul Morgan with Morgan Stanley.

If I just kind of stay on the leasing side and look at your disclosure by size, you continue to make progress on the small shops and there was 70-basis-point improvement on the under 2,500, but then it kind of went back a little bit on the 5,000 to 20,000 square feet. It sounds like you're pretty constructive on kind of based on what you see regaining that momentum, but is there any specific in terms of that you mentioned maybe Blockbuster maybe rolled into the first quarter as well? But in terms of the 5,000 to 20,000 square feet, anything noteworthy there in terms of the 50-basis-point or so decline? And then on the small shops, is it too early to say that Set Up Shop could be doing anything for the small guys?

Yes, let me start with the smallest side, Paul, it's been a real focus obviously of ours and some of our peers at 2,500 and less. And Set Up Shop, while it's not moving the needle. It certainly has some positive. We've been pleasantly surprised, we probably have about 15 deals signed or close to being signed in less than only 2 months of this initiative. It really has been a pleasant surprise. And we're going to move on, and as we've announced recently, we're going to roll it out in Florida. It doesn't sound like a big deal, but if there's 15 deals done in Atlanta, we only identified about 100 specific spaces for the program, so immediately, we're picking up on our recovery rate in those centers. And hopefully as we continue to work with the new tenants and establish their business, we're going to have some long-term play at that some significantly higher rents, but that's not the entire story behind the improvement in the 2,500. Consolidation of shop space is a big deal, and that really has been more of an impact on that smallest space versus the 5 to 10 or even the 5 to 20. Since 2010, I think we've been there and we have this in our investor presentation about 100 -- 300 units, almost 800,000 square feet that we have combined to larger units with players like Ulta and Shoe Carnival and Kirkland's and Carter's. So that's all good news. And we'll continue to -- I look at the first quarter in terms of the 5 to 20 as a -- where that declines rather lowest square footage improved, it's just a blood. That space will come back. Again, we're just focused on the small shop space. They've been the big beneficiary of the consolidation, whether it's expanding existing units or combining 3 units into one tenant, such as PetSmart. But again, it's a real focus of ours and we're pleased with the improvements today.

It might be worth taking a look, we do have a revised investor presentation online. And there is -- we do discuss at length on Page 34 where we talked about small shop absorption and what's happening in the portfolio, and on Page 49, we talked about small shop consolidation. And it's really what Paul was talking about. So while the absorption rate continues to improve, so move-ins are exceeding move-outs fairly dramatically, and that is something that didn't occur, obviously, in the last couple of years, and we've also started to materially impact the portfolio from a consolidation perspective. So if you go to the investor presentation that we have on our website, those 2 sections I think are pretty illustrative of what we're seeing in the market.

[Operator Instructions] And your next question comes from the line of Jason White with Green Street Advisors.

I just had a quick question. Hopefully, you could provide some color on breaking out the releasing spreads and the same-property NOIs for the U.S. and Brazilian portfolios.

Yes on the same-store NOI, I think we wanted to be responsive to feedback we got regarding not just the internal way that the operating platform here looks at all the assets is the same, so look at 100% view. We wanted to make sure we were addressing what the investment community thought was most valuable, so we have added for good amount of disclosure on a pro rata operating stats and so what we disclosed was that at 100% same-store NOI was 2.9%; on a pro rata basis looking at our economic ownership interest in all the assets, it was 2.3%; and if we dissect that number between domestic and Brazil, Brazil was still by far the highest at around 9%; domestic same-store NOI growth was around 2% for the quarter. On leasing spread, there hasn't been that much of a difference between the 2, whether you're looking back or on a forecast basis looking forward, largely because while the growth overall has been higher in Brazil, a lot of that is captured through more significant annual rental bumps, and so they really seem spread in Brazil have not been meaningfully different than domestically. Certain quarters they've been higher, certain quarters they've been lower. In general, they've probably been slightly higher, but not a material difference there just because so much has picked up from the annual bumps, and so the end of the lease isn't as meaningful down there for the releasing spread. And also on the renewal and new deal spreads, the difference with a pro rata, it's important to note that point up a strength of the wholly-owned portfolio and that's one of the reasons we're showing this.

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

I'm on with Jordan Sadler as well. Dan, I appreciate your comments at the -- in your prepared remarks about the merchandising of retailers, and I was just wondering how do you underwrite or evaluate that view with your decisions to sign leases today, should we read into that, that DDR has become more selective with regard to signing leases with new tenants? And then also, how do you sort of view new leases versus renewals with all that in mind? Can you elaborate on that a bit?

Sure, Todd. It's a great question. And we have become more selective because we paid a price. We've made some mistakes down the line, primarily not in leases that we wrote ourselves. But on the acquisition side, really not being critical enough of some of the leases that were on in assets that we acquired when we didn't have great faith in some of the merchandising strategy and some of the retailers that we paid full price for, and that's something that we are being very careful, not just in who we sign leases with, but how we're evaluating acquisition opportunities as well. The way we mitigate that really is by spending a lot of time with the tenants and, not just meeting with real estate department, but are often meeting with merchants or talking with the financial folks about what their business plan and their business model is. But retail is an incredibly treacherous business because really it is a voracious consumer of capital and if you're wrong, if you miss in any given season or in some cases with some of the tenants that are out there, you miss in multiple quarters over several years, it absolutely devours your cash situation. And so while there are many tenants out there that have very little debt and have lots of cash, that can go away very quickly if you're wrong and if you're repeatedly wrong. So we have to be very, very sensitive to it. We have -- fortunately, we have a number of people in this company, starting at the Vice President level, on-off that has spent a lot of time working for retailers. And I think that gives us an advantage because when we walk through a store, we understand what to look for. And I think we also understand what questions to ask when we meet with retailers, we can get a good feel for what the strategy is. There are clearly tenants that we're not anxious to do business with and it's not because they're not great people, it's not because they don't have beautiful stores, it's because we're not so sure how sustainable the business model is based on what we see when we tour the stores and that is something that we discuss on a regular basis. So it comes up, it comes up in conversation, we have become much more selective. As our occupancy rate goes up, you become even more selective because you have the opportunity to do so. And I don't see any reason why that won't continue based on the leasing trends that we see.

The selectivity is also another positive dividend from the philosophical change from an FFO per share focused company to a net asset value per share focused company. And if you don't have that philosophy right at the top, it's going to drive every little decision, whether you think they'd be tied into seniormost level philosophy or not. And I'll tell you in the past, when you're underwriting, who is going to contribute the most to FFO per share next year. You cared less about how much capital you might be putting into a suboptimal tenant, you cared less about credit quality and you cared more about what that day one headline rent was going to be. And at this point, when we're saying the goal is what makes this portfolio as valuable as possible over time with a relatively low risk profile, it means let's be very cautious about putting capital into deals with tenants we don't feel great about and it also means someone paying you a little less today but its cash flow stream might be valued at a higher multiple or lower cap rate could be very important for us, and so you see that philosophy coming down and driving that selectivity also.

I think it's worth pointing out just one example to what both Dan and David were talking about, where we had an existing tenant replace For Your Entertainment, FYE, in 2 centers, current on their rent, with a lot of term and we had the ability to do 2 [indiscernible] deals. That's the position we're in now with the prime assets where we could terminate and achieve little bit of a fee from FYE and put in a much, much stronger long-term player index.

Your next question will come from the line of Carol Kemple with Hilliard Lyons.

In your results, when you talk about at a 100% ownership, is that assuming that everything in a joint venture, you all own 100%? Or what's kind of difference between that and a pro rata basis?

Yes, that's exactly right, Carol. And historically, I think because the internal focus and the way that our operating departments look at it, it is we own this entire portfolio, we are responsible for leasing and managing this entire portfolio. And so internally, to make sure that our people are just as focused, that we do share a duty we have on behalf of a partner even if DDR only owns 10% or the greater financial impact of that on our results, we own 100%. From an Investor Relations and accounting standpoint, we've got to be focused on the pro rata figures in terms of what has been the most economic impact. But the reality is, individual leasing professionals are working their hardest to lease all of our assets and in many cases, aren't even exactly aware of how something is owned. And so for us, we had historically reported everything on a 100% basis simply because internally that is how the operating department look at it, but have certainly wanted to respond to feedback we've gotten over the past year about the value of pro rata statistics and so that's why we've added that disclosure. So the numbers comparable to prior periods are the at 100%, the pro rata disclosures is something we added this quarter and that we will keep going on a go-forward basis.

I think it's also important to note that some of the numbers when you look at it on a pro rata basis are somewhat surprising. One of the things I think many people assume was that you didn't do pro rata because the numbers would have been inferior if you did it on a consolidated basis. But if you really look at the numbers and you go back to what Paul said during his script, for the first quarter, new deals were executed at a 6% rental increase, but on a pro rata basis the spread was at 9% rental increase. So actually the whole young portfolio in many respects is performing at a higher-level than some of the other assets that we had in joint venture. So I think that's -- there's some very good news to be had when looking at it both from a consolidated and a pro rata basis.

Your next question comes from the line of Michael Bilerman with Citi.

Just thinking about some of the lease stats where you have the noncomparable space. It's been give or take 20% to 25% of total leasing, just under 5% of the total portfolio of the last 12 to 18 months. And I'm just curious sort of what impact -- because you don't give the spreads, but what sort of impact has that had on sort of underlying same-store NOI in terms of the growth of the business? And then just, David, can you just clarify just -- I know we're dealing with decimal points, but U.S. you said was about 2%, is it -- can you just give the -- is it 1.5%? Is it 1.7%? Is it 2.2%? And does it include Puerto Rico? And if we could get the disclosure on a country basis going forward so I don't have to ask it on the call, that would be helpful as well.

Sure, Michael a couple things. One, for just domestic U.S. consolidated assets, the same-store NOI growth was exactly 2%. Puerto Rico this quarter happened to be slightly lower than that, and so including Puerto Rico with that hybrid domestic, you'd be slightly below 2% at 1.9% for the consolidated domestic portfolio with Puerto Rico included. And so, we're happy to give more information there. One of the challenges is, of course, Sonae Sierra Brasil, is a public company at this point. Sonae Sierra Brasil has not reported their first quarter earnings and they are traditionally on a period that is slightly after ours. And so there are some stats that just because they are a public company with other shareholders, that were simply not going to be able to give in this great detail and that are going to have to come out of the detailed disclosure that they provide. The one thing that I'll say about the leasing split between comparable and noncomparable is just a nomenclature issue. That is not meant to be what's defined in our same-store. So our same-store relates to which assets haven't changed, don't have redevelopment activity, and have been owned for the requisite period of time. It's not simply a comparable, noncomparable being defined as what's in same-store NOI and what's not in same-store NOI. A large portion of that noncomparable could be in same-store NOI, it's just the space has been changed. In one way or another, it could be in some cases, assets that we acquired from England or someone else where they just haven't been leased, and that's a period of time where we simply don't have comparable information, and so it's not meant to be some secret number that we have, that we go out of our way to disclose. There isn't a comparable calculation that would make any sense to disclose there, and so I think that's why we've consistently pointed people to the renewal spread as a much more legitimate economic indicator. But what's going on with rental rates, we provide the disclosure on new leasing, but did want to make sure you have that distinction. The comparable versus noncomparable as defined here is not consistent with same-store versus non-same-store. It could be a lot of different reasons that it gets into that other bucket.

And the other reason why renewal rates are the right indicator and a good fuel for what's happening in the portfolio is because it makes something in any given quarter between 70% and 80% of the total deal volume that occurs. So when you're putting up the numbers that we're putting up and you have real good numbers on 70% to 80% of that, it really is the indicator of what's happening in the portfolio. That's why you see such a wide variety of new deal spreads throughout the industry because some folks do a lot of deals that are new, and some people do 5 deals a quarter that our new. And it has a huge impact on what the actual spread is. So we're very focused. As Paul mentioned in the script, we're very focused on the renewals and we think that, that's a good leading indicator on the health of the portfolio.

Your next question comes from the line of Christy McElroy with UBS.

And following up on the renewal rates discussion, you talked about leasing spreads being sustainable in the mid- to high single digits. And just looking at your lease expirations schedule, for the less than 10,000 square-foot space, it seems like the average expiring rent for 2012 is much higher at about $30 a foot than the portfolio average. Is there something sort of weird there going on in terms of the space mix? Or should we be worried at all about spreads narrowing on that space this year?

Yes, there is. There is something -- that's a Brazil story, Christy. There's some centers turning on their 10-year term on it, so we're seeing a high percentage of renewals in the Brazil portfolio. And that's really what's driving that less than 10,000 square foot base rent number up.

Your next question comes from the line of Rich Moore with RBC Capital Markets.

Dan, I think you mentioned the 2013 to 2014 open-to-buys and rent, is there any chance this can lead to more redevelopment and possibly improve non-prime assets to the point where it's prime again?

Yes, I think it will. I think that's exactly right, Rich. We are seeing a situations now where projects are coming up on the redevelopment platform and we are converting some of the assets from non-prime to prime as a result of tenant interest. And I think that will increase as folks come to the realization that development is not going to accelerate dramatically anytime soon. And I do think, though, when you go to Vegas and you walk around, you will see a lot of development projects that are being presented. Many more I think this year than you've seen in past years, but I'm not so sure they get built. So I do think the opportunity and what you have, the space that you have going forward should be worth more to tenants. And it will prompt, I think, expansion of the redevelopment, if not acceleration of the redevelopment program. I think it's going to be very, very necessary for the tenants to look at redevelopment opportunities, to look at prototype size, to increase their flexibility, to look at even new concepts, Rich, because many of these concepts are there. And the opportunities to enter into markets may not be at the existing price point, it might be with new merchandise at a different price point. I think we're going to a fascinating period of time where over the next 2 or 3 years, we're going to see the retail business evolve in a way that's going to be very, very exciting, and that's why we spent, like I mentioned earlier, so much time with the tenants because you never get the same answer twice. There's a lot of things happening that's moving very, very quickly and we need to stay in front of it. Redevelopment is something that I think will continue to be prominent. And I know a lot of folks are talking about it and many of our peers are doing a great job with it. I wouldn't be surprised if it accelerated even further.

Your next question comes from the line of Michael Bilerman with Citi.

I figure I'd give it one more shot. Where I was going with the non-comp space was just given that it's -- in the last 15 months is 3.3 million square feet, and I fully recognize that renewals is almost 8 million square feet over the last 15 months and that's even well over 10% of the portfolio. But I'm just trying to get a handle on this 3.3 million square feet that's been leased over the last 15 months, it's almost 5% of the portfolio. What was underlying -- how were those leases affecting 2012? Is it a substantial contributor? Or is it more of a downsize opportunities where rent on a basis is coming down? Just to really understand what that impact is on the financials.

It's a substantial contributor, Mike. And downsizing opportunities do not mean rent is coming down, by the way. In many cases, it means rent is going up. And there's some good examples of that in the investor presentation that's online. So the assumption that the rent is coming down on the downsize, particularly in the prime asset, where you're not in a distress situation, you're going to see rents go up, it's an opportunity to mark-to-market. So that's why we like downsizing, that's why we're pushing for downsizing. The new deals, they're a substantial contributor because they were vacant for the most parts. And when those numbers come online, it usually takes more than a year to see the full contribution, if that's really sort of your question. Because as you know, most of our tenants don't open at any time during the year. And whenever we do deals, we're lucky if we get a partial year in the year that they open. And then you have to wait until the next year to get the full year. So the contribution for the year in which the deal is done sometimes is 0, sometimes it's minimal, but it's significant the following full year that you get the impact of the rent. And that's why you're seeing the same sort of NOI in the portfolio go up over historical averages even though the leasing velocity has been great, the benefit for 2012 is really for deals that were done in 2011 and some actually that were done in 2010, but you don't get the full year benefit until 2012. Same thing is going happen in '11, for 2013, and same thing will happen in 2014 for the deals that are being done in 2012. So the contribution is significant. We're not giving rent away. The basis in those space is usually 0 because they've been vacant for an extended period of time and are consolidated deals and downsizing. The truth is, we don't have to do them if we don't make money, and we're not doing them if we don't make money and if it's not positive to the overall NOI growth at the asset level.

And at this time, we have no further questions. I would like to turn the call over to the DDR management for closing remarks.

Thank you very much for joining us, and we look forward to touching base with you at the end of the next quarter. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful call -- have a wonderful day.