President & CEO Dan Hurwitz and David Oakes, CFO and Senior Executive Vice President are presenting for Developers Diversified Realty at NAREIT's REIT Week.
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Below are notes from the session:
10:11: Hurwitz: As a company, we're very excited about where we sit today. ... As a company, we've leased in 2009 and 2010 combined 22 million square feet of space and on track to do another 10 million square feet in 2011. That provides us with considerable organic growth. ... We are no longer a company that's just focused on FFO. We think it's important and it's a metric we track very carefully. But NAV growth is really the driver of decisions we make internally. ... We've sold more than $2B in dispositions since 2007 and most recently we've become an acquirer and have made $100M in acquisitions in the last three quarters. ... Our primary focus in the past two years has been to reduce the risk profile. Debt duration has been(lengthened) and we have been upgraded by Moody's, S&P and Fitch.
10:15: Hurwitz: We are extremely optimistic coming out of Las Vegas. Tenant demand is extraordinarily high and clearly outstripping the supply for space. The positive trends that you have seen in our operating metrics … will continue for the foreseeable future.
10:17: Oakes: On leasing side, positive spread the last several quarters. … On new leases, high single digits and could go into double-digits. On renewals, low-to-mid single digits. … Seeing positive trends that are getting better in terms of headline rents and net effective rents.
10:18: Hurwitz: One of biggest surprises we had at RECon is view that reduction of store size is negative. We like smaller store sizes. (Greater efficiencies, higher merchandise turnovers, other positive factors.) … One of the things that is happening is that in our prime portfolio we are 94 percent leased and will be higher at the end of the year. So there's not a lot of space to lease. So if you have tenants looking to reduce, you can free up space to bring in a new tenant at a higher rate. … The operating metrics, the financial metrics will improve for tenants and it will give us opportunity for organic growth on assets where it otherwise would be muted by the high occupancy rates.
10:25: Hurwitz: (Small shop space) has improved dramatically. … There's a couple indicators that are very exciting. We met with a number of franchisees and franchisors and business is picking up in that area. Franchisors are offering a lot of financial stability to franchisees, which is important because it's not easy to get a lot of financing today. … SBA loan volume is up as well. That's good for us. Franchisee will use that to secure space and inventory. … Have to keep in mind that we're coming off a low base. Numbers are positive, but we're not quite back to where we were.
10:28: Hurwitz: It's fashionable to talk about development, but don't think we'll see a lot of it. … We will have in our case some projects that we'll proceed with where we already own the land. But overall to go out and find new sites to provide growth opportunities for retailers, it's much wiser to do that in redevelopment play than a development play. … Projects are zoned and entitled. And retailers are being flexible in prototypes to accommodate redevelopment. … We're better off focusing on redevelopment than development.
10:30: Oakes: We would lean more to duration issue than overall level of debt. The duration was what hit us harder than others. That's huge focus and continues to be a huge focus. Taken duration out from less than three years to more than four years today. … We will push that out further. Our largest year of maturities is still 2012. … Still have more than $1 billion maturing in 2012. There is a $550 million term loan that is the major focus. … On overall leverage level, debt-to-EBITDA down from more than 10X to low 8X, with plans to bring it down further. … You'll continue to see continued progress on that metric, largely driven by EBITDA growth.
10:35: Oakes: Are seeing more buyers and more capital being raised and debt being more available, so we will continue down a path to sell our non-prime assets.
10:37: Hurwitz: Seeing a lot more financial engineering coming back to the market. … We think the operational risk is sometimes being ignored. There's a very good chance that there will be a decline in NOI on some of these assets. … What has encouraged us is that there are more people ignoring the operational risk and focusing on the financial risk and the financial risk is lower today than it's been in a while.
10:40: Hurwitz: With the exception of Centro, there are no big portfolios. … Where you see people talking about selling lots of assets, it's a process, not an event. … You have to be realistic about. Realistically, we are going to see many one-off transactions.
10:45: (What makes assets non-prime?) Hurwitz: They are the assets that do not meet our growth aspirations or won't make the most money going forward. Some of them can be highly leased. Maybe we brought them from 85 percent to 92 percent occupied. But going forward, we may think it's more likely that it goes back to 85 percent than it rises to 95 percent. … Very often the time it takes to work on non-prime assets is not appropriate for the return. … Retail is not a commodity. It is a build-to-suit business. … If an apartment or office goes empty, there is a big roster of tenants that can take that space. That is not true in retail.