Site Centers Corp (SITC) 2015 Q3 法說會逐字稿

Good morning, and welcome to the DDR Corp. third-quarter 2015 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Meghan Finneran, Senior Financial Analyst. Please go ahead.

Thank you. Good morning and thank you for joining us.

On today's call, you will hear from President and CEO David Oakes, CFO and Treasurer Luke Petherbridge, 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 on reasonable assumptions, you should understand these statements are subject to risks and uncertainties and actual results may differ materially from the forward-looking statements. Additional information about such risks and uncertainties that could cause actual results to differ may be found in the press release issued yesterday and the documents that we file with the SEC, including our Form 10-K for the year ended December 31, 2014, as amended.

In addition, we will be discussing non-GAAP financial measures on today's call, including FFO and operating FFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release issued yesterday. This release and our quarterly financial supplement are available on our website, at www.ddr.com.

Last, we will be observing a one question limit during the Q&A portion of our call, in order to give everyone the opportunity to participate. If you have additional questions, please rejoin the queue. At this time, it is my pleasure to introduce our President and Chief Executive Officer, David Oakes.

Thank you, Meghan. Good morning and thank you for joining our call.

I would like to discuss four topics this morning, including the advances that we have made internally and the three pillars that I discussed on the prior call, which include progress on the portfolio upgrade and the focus on quality of dirt, our laser focus on capital allocation, and a lower risk profile.

Internal progress continues to exceed share price performance, a divergence that we believe will narrow over time. Our most significant internal stride this quarter was the completion of three weeks of portfolio reviews; and reinstating this process allowed fresh eyes to analyze the portfolio through new opportunities, including expansion, redevelopment, disposition, and exploring the highest and best use for our real estate.

I am very pleased with the results of the reviews. We identified over a dozen new expansion opportunities and several new redevelopment projects, including the opportunities to add multi-family, self storage, and additional ancillary uses at a number of assets.

As I mentioned last quarter, there are three pillars this management team is focused on, owning the best locations for the future of retail, prudent capital allocation, and executing with a lower risk profile. I would like to elaborate on the focus on high quality dirt and the last legs of our portfolio transformation in detail, as we believe this is misunderstood in the market.

DDR does not need to sell assets. We are not in the early innings of any transformation. There is no disposition program. We have sold nearly 500 assets since the recession, and the last remaining assets that we have identified for sale are of a much higher quality and are being marketed opportunistically as a result of high market pricing. These are largely what we describe as prime minus assets, characterized by growth below our prime portfolio or risk in the out years that is under appreciated today.

Given the current pricing for these assets continues to be in the 6% to low 7% cap rate range, we have taken the stance that this is a prudent time in the cycle to sell more than we are buying. Surprisingly, we are selling the bottom tier of our portfolio at a pricing range that is comparable to the implied cap rate of which DDR has traded over the course of the past few months.

Regardless, this decision should not be misinterpreted as downplaying the quality of our portfolio and is more simply our stance, different than peers, that selling in a historically high pricing is prudent. We have a rigorous asset quality prism that all assets are run through and we will not sacrifice our standards to align with short-term bull market strategies. While the decision to sell when prices are high appears to be out of favor in the current market, we are confident it is a judicious capital allocation decision that will prepare DDR to outperform in all cycles going forward.

The second pillar on which we are focused is capital allocation, which was evident this quarter in higher net effective rents and prudent spending on minor redevelopments. Our operations team is increasingly focused on return on capital, which resulted in the second highest average net effective rents since the recession, and we believe that improved deal economics create more value for our shareholders than quarterly volume statistics.

The third pillar on which we continue to execute is to operate with a lower risk profile, which was reflected in our decision to sell good assets with sub optimal credit or growth profiles and augment our portfolio to include more power centers situated on the highest quality dirt. While many market participants define risk simply by quantitative leverage metrics, we feel that the quality of our EBITDA is at least as important as its ratio to debt, and we will continue to upgrade the income stream to perform in both bull and bear markets. With that said, we intend to be a net seller of assets in 2015 and potentially 2016, and therefore, should benefit from debt to EBITDA reduction in the coming quarters.

Additionally, subsequent to quarter-end, we issued $400 million of 10-year unsecured notes with a 4.25% coupon. The proceeds from this issuance will be used to repay $350 million of convertible notes in November. Our decision to commence the offering prior to the maturity of the convertible notes despite the market volatility and cost of carry is directly representative of our focus on reduced risk when it comes to liquidity, duration and timing of capital raises.

To conclude, our team comes to work every day focused on building a fortress portfolio of power centers, allocating capital prudently to provide the best risk-adjusted returns for our shareholders, and by operating with a level of risk to allow for outsized growth in a strong market and sustainable cash flow and refinancing capacity in a weaker one.

We appreciate the support of both our Board and those long-term investors who recognize this is a long cycle business and have supported the Company. As I mentioned on last quarter's call, this team does not take under performance lightly. However, we have conviction that the steps undertaken today will result in the increased net asset value accretion over the long term.

I'll now turn the call over to Paul.

Thanks, David.

The overall leasing environment and operating fundamentals remained positive in the third quarter. We continued to experience strong retailer demand and deal volume, as we executed 382 new deals and renewals for 2.9 million square feet, a significant volume for a portfolio that is 95.5% leased.

I would like to specifically highlight the starting rents for new deals and renewals at $19.70 per square foot and $15.75 per square foot, respectively, both great numbers and indicative of the leasing environment and the consistently improving quality of our portfolio. Furthermore, net effective rent per square foot for new deals at $15.78 represents the strongest performance in years, and costs as a percentage of net effective rent remained in line with our historical average.

Same-store NOI was also strong in the third quarter, as the 3.2% increase is in line with our top quarters in the past several years. Leading same-store growth were highly occupied prime plus assets that continue to generate significant mark-to-market opportunities. For example, the top contributing assets this quarter were Midtown Miami, Shoppers World in Boston and Woodfield Village in Chicago, three of our highest quality assets. All three benefited from strong new lease growth and remerchandising efforts, as we added the likes of Nordstrom Rack, Cost Plus and Trader Joe's, respectively.

Turning to spreads, for the quarter we achieved a positive pro rata new deal spread of 12.3%, and a positive pro rata renewal spread of 7.1%, resulting in a combined pro rata spread of 7.9%. While the new deals spread is lower than the recent past, it is important to note that we had a smaller number of box deals in our comp pool than in the last few quarters, and the larger box deals naturally have the most significant impact on spreads.

Rent trends, as evidenced by the strong starting rents and net effective rents, remain very positive and we expect new deal spreads to remain comfortably in the double digits for the foreseeable future. It is also worth noting that 81% of all new deals and 42% of renewals and options executed this quarter contain rent bumps within their initial term, leading to additional growth beyond the reported spread, which of course are based on first year cash rent over the last year cash rent and do not reflect this additional growth from contractual increases. This focus on rent steps is one of the most significant recent changes we have made as we negotiate and analyze deals and one that we continued to leverage during a quarter in which we experienced a tenant retention rate of over 90% versus a typical retention rate of 85%.

Our overall lease rate remained flat quarter-over-quarter, at 95.5%. The flat lease rate was due to a few factors. First, we continue to sell low growth assets with lease rates in the high 90s to 100%, and in the third quarter sold 2.3 million square feet with an average leased rate of 96.5%.

The second contributing factor was the signing of new leases on spaces that were already included in the leased rate. Despite significant leasing volume resulting in improved tenant mix and credit quality, these deals resulted in little impact on the leased rate.

Third, we continue to encourage vacancy from weaker tenants, such as Kmart, in an effort to further increase the quality and mix of our centers. As we have talked about on many occasions, this focus on improving the caliber of our tenancy will result in mixed results in the leased rate on a quarter-by-quarter basis. With that said, we continue to make progress in the small shop category, as the leased rate for space under 5,000 square feet increased 50 basis points sequentially, driven primarily by strong debt absorption.

I would like to take a few moments to update you on the progress we are making in two of our larger redevelopment projects, The Pike Outlets in Long Beach, California and Sycamore Crossing in Cincinnati, Ohio. The Pike Outlets, located in Long Beach, is a 363,000 square foot outlet center serving several communities in Los Angeles County, including Huntington Beach and Newport Beach. After a thorough analysis, we found a significant void in the surrounding trade area for a mix of outlet tenants and made the decision to proceed with the format in 2013.

Following a tremendous effort from our leasing team, we held a grand reopening on October 2, and tenants including Nike Factory, H&M, F21 Red, Converse Factory and Gap Factory all opened strong and are performing well. Furthermore, earlier this year, Restoration Hardware Outlet nearly doubled its store size with an expansion, and they continue to perform extremely well. In addition to the recent openings, we now have signed leases with Columbia Sportswear, Cotton On, Hot Topic and Starbucks. The Pike Outlets is now 88% leased, and we have strong retailer interest for the remaining space.

As a further demonstration of support for this redevelopment, Cinemark underwent a multi-million dollar renovation to bring their latest and greatest technology, seating and customer experience to the project. All major redevelopment work will be complete in the fourth quarter, and we expect the project to be stabilized in the third quarter of 2016.

The second project is Sycamore Crossing in Cincinnati, Ohio. Located directly across from Kenwood Mall in a dense retail corridor with average household incomes of $89,000, Sycamore Crossing is a 390,000 square foot prime plus shopping center also undergoing a major redevelopment. Sycamore was initially acquired in a JV with Blackstone in 2013, and we acquired Blackstone's interest in 2014.

Given strong retailer demand and the center's location in the heart of the number one shopping area in Ohio, we saw the opportunity to invest and significantly drive NOI and create value. At acquisition, the center included an undersized and non-prototype Dick's Sporting Goods, an oversized Staples, naked leases for Barnes and Noble and Old Navy, and significant vacancy. Other existing tenants included The Fresh Market, Macy's Furniture and Ulta.

We have allowed the Barnes and Old Navy leases to expire, and right sized and relocated Staples to make way for a new state-of-the-art, two-level Dick's Sporting Goods and a new Five Below. We have also backfilled Barnes and Noble with T.J. Maxx, and are in active negotiations with other best-in-class retailers for an additional 50,000 square feet. Staples opened in their new space at the beginning of October, and Dick's Sporting Goods will be opening, along with Five Below, during the fourth quarter of 2016. When complete, this will be the dominant power center in the strongest sub market in the MSA, with a grocery component and further opportunity for NOI growth and value enhancement.

To provide an update on Puerto Rico, which comprises approximately 10% of pro rata based rental revenue, I would like to reiterate a few important points that I mentioned on our call last quarter. 90% of our Puerto Rico portfolio value was comprised of prime plus or prime assets, 60% of the portfolio value is in the top three prime plus malls, and 70% of the base rent is derived from US-based credit worthy tenants, all of which emphasize the quality of our portfolio and cash flows on the island.

While the macro environment continues to be portrayed poorly in the media, year-to-date we have experienced 360,000 square feet of total leasing activity on the island and continue to see reported sales across our entire portfolio that are relatively flat on a rolling 12-month basis, with four of our top five assets actually reporting small sales gains.

From a deal perspective, we are still seeing new retailers who view the island as an attractive location as they look to expand. In addition to the Dave and Busters deal we executed during the second quarter for their first location on the island, at Plaza del Sol, in third quarter, we signed a lease with H&M for one of their first two locations on the island at Plaza del Sol, with an opening date in late 2016. These are significant additions to our top asset on the island and represent strong statements regarding retailers' views of the long-term strength of retail in Puerto Rico.

As noted previously, we recently recaptured two Kmart boxes in Puerto Rico at natural lease expiration. The Kmart departures did have an immediate impact on occupancy, but will have minimal impact on our NOI stream, as rents for these spaces are significantly below market, and ultimately will result in attractive opportunities for rent growth and merchandising improvements.

In closing, I would also like to turn your attention to a new disclosure in our quarterly supplement indicating which of our properties include a grocery component. As you know, we are consistently referred to as the preeminent owner of high-quality power centers, which, while we agree with the characterization, fails to account for the everyday traffic that more than two-thirds of our properties benefit from with tenants offering groceries, such as Walmart, the world's largest grocer, and others including Sprouts, Kroger, Publix, and Whole Foods. As you know from private market pricing, top power centers with a grocery component and top MSAs are consistently trading in the mid-5% cap rate range, and we thought it appropriate to highlight our significant exposure to this property type.

I will now turn the call over to Luke.

Cheers, mate. Operating FFO was $113.5 million, or $0.31 a share for the third quarter, which was 6.9% increase over the prior year. Including non-operating items, FFO for the quarter was $113.4 million, also $0.31 per share. Non-operating items consisted of transaction costs.

I'd like to begin today by providing more color on our quarterly and year-to-date transactional activity and the final stages of our portfolio repositioning. During the third quarter, we closed on the sale of 19 institutional quality operating assets for $143 million at our share, bringing full-year share of dispositions to $258 million, with an additional $268 million under contract that we expect to close by year-end. As David mentioned, we have exceeded our original disposition guidance, because the current environment exhibits extremely attractive pricing for our product type.

I'd like to emphasize that our dispositions today are not comparable to the assets we sold shortly, during or after the recession. Our dispositions in 2009 sold for a weighted average cap rate of above 9%. These assets were primarily located in tertiary markets, had weak merchandising mix, and the mediocre quality of the real estate kept occupancy level challenged following retailer bankruptcies.

In contrast, our year-to-date dispositions have sold for a weighted average cap rate in the low, or mid to low 7%s and have an average of 125,000 square feet and 97% leased. These assets are stabilized, institutional quality centers, but typically have lower growth profiles than what we underwrite in our prime plus assets.

To illustrate this further, we sold to an institutional buyer a Walmart and neighborhood-anchored power center located in North Charleston, South Carolina at the end of the third quarter for a mid-6% cap rate, nearly 150 basis points inside our internal valuation. The center has a decent merchandising mix, solid credit from national tenants and some future growth, but minimal opportunities for value creation and is situated in an MSA that may pose risk backfilling vacancies in the next downturn.

We are also under contract to sell a prime minus Fresh Market-anchored stabilized power center in Chattanooga, Tennessee for a sub 6% cap rate. The center's other tenancies include Hobby Lobby, Shoe Carnival and Best Buy, all of which are generating good sales volumes. Both of these examples highlight the focus on opportunistically rotating our capital into other opportunities which will deliver higher longer term returns to our shareholders. These are something we will continue to do if this level of pricing persists.

To date, we have additionally sold 14 assets from our third joint venture with Blackstone totalling $213 million, at a price approximately $0.20 higher than our acquisition just 12 months ago. The sale of these assets, contemplated prior to the acquisition, has not had any impact on the $300 million of preferred equity issued to the joint venture. But we do expect the balance to reduce ratably as we continue to sell the lower quality assets in the joint venture. We ended the third quarter with $626 million of assets sold or under contract and we remain confident that we will meet our original acquisition guidance of $250 million and end the year as a net seller.

I wanted to spend a few minutes now looking into 2016, our residual non-prime portfolio and our expectations for further portfolio enhancement. We currently have 30 wholly-owned non-prime assets representing approximately 4% of our value, and estimate by the end of the year 2016, there will be less than 12 assets, representing 2% of the value.

We want to ensure people understand that due to the significant reduction of this non-prime pool, any further dispositions will be considered with extreme price sensitivity. If the transaction markets continue to exhibit the depths and strength that we seen in 2015, we will continue to opportunistically take advantage of them in 2016 and be a net seller, although most likely at a smaller magnitude than 2015. Conversely, if pricing softens, we are absolutely comfortable with our portfolio, with its tenancy and locations, that we can generate appropriate returns throughout the next cycle, and are confident that the considerable net proceeds raised this year can be attractively reinvested in the future.

With regards to our joint venture platform, we continue to review with our institutional capital partners the pruning of their portfolios over time. However, due to our minority economic interest, which varies from 5% to 20%, the economic impact is minimal.

Turning to capital markets activity. After observing the volatility in the unsecured debt market in late Q3, we are extremely pleased to issue $400 million of 10-year unsecured notes at 4.25% coupon earlier this month, and take advantage of a sub 2% US Treasury. The issuance was nearly five times oversubscribed, allowing us to price inside expectations, and roughly in line with our secondaries.

The proceeds will be used to fund the November redemption of $350 million of convertible notes, and the remainder will be used to pay down our line of credit. With the anticipated near-term asset sales, we feel that we have sufficient liquidity that will be able to fund all upcoming debt maturities and are not required to raise any further capital for at least 12 months, and possibly longer.

As David mentioned, one of the three pillars by which this new management team is operating is an increased focus on the appropriate risk profile. While we continue to underwrite new acquisition and redevelopment opportunities, we anticipate that excess disposition proceeds, as well as EBITDA growth, will allow us to lower debt to EBITDA by one turn in the next two years. However, we continue to acknowledge that risk reduction goes beyond our debt to EBITDA ratio, and prudent capital allocation has allowed us to capitalize on favorable market trends to better position our portfolio for long-term value creation.

With that, I will hand the call back to David.

Thank you, Luke. I would like to conclude by updating you on our 2015 full-year operating FFO per share guidance. We are now forecasting a range of $1.21 to $1.24 per share, representing a $0.01 tightening on both ends and a midpoint that continues to align with our original 2015 guidance and equates to 6% growth over 2014.

We will release 2016 earnings guidance in January, as is our normal practice, and we feel confident that the strength of our operating fundamentals and our ability to source new acquisitions, reduce expenses, and find new fee streams will mitigate earnings dilution from a considerable opportunistic asset sale program that is currently forecasted in the market and will continue to allow us to grow, both in the short term and in the long term.

Thank you for your time, and I will now ask the operator to open the call for questions.

Thank you.

(Operator Instructions)

Our first question will come from Todd Thomas of KeyBanc Capital.

Hello. Thanks. Good morning.

David, you talked briefly about the portfolio reviews and that you've identified more than a dozen new expansions some development opportunities, including some densification projects, adding other uses you mentioned, like multi-family or self-storage. Can you provide some color on these future opportunities, what the scope might look like over time? And then in instances where there are other uses involved, whether DDR would look to bring in a partner or whether the Company would operate some of those other properties?

Sure. I'm happy to give you a little color. I think until we advance these further, I'm not going to give extraordinary details.

But certainly, we're pleased with progress we made going through the entire portfolio and finding opportunities where, given the focus on quality locations, in some points we found that there was more that we could do on a site. I think we've think we've given clear guidance that near term, we think the credible, profitable redevelopment expander's in the $100 million a year range. And so some of this goes to backfilling that pipeline, as you look into the out years, and some of it hopefully goes to expanding that pipeline, as we look at more opportunities to expand or reconfigure existing centers, or just add density, as we are finding a few opportunities where that 's possible and, we think, very profitable.

We will continue with, I think, a very prudent stance on the fact that we think we are extremely good at operating and developing power centers and allocating capital, but not necessarily experts in other property types. We also think it's reasonable to assume that if we did find opportunities for other property types on our assets or on our locations, that we would look to either monetize that or look to bring in a partner, if we did pursue that, where we would not be, or highly unlikely, that we would be doing that on our own, at this point.

Our next question comes from Michael Bilerman of Citi.

Good morning. You guys spoke a little bit about the Blackstone joint venture in terms of the asset sales that have occurred since you've closed the deal last year. Can you talk a little bit more broadly?

It looks as though debt has been paid down. Your preferred hasn't been touched. And I'm curious why Blackstone is not paying off the highest part of the cap structure, or the most expensive?

And so can you talk a little bit about A, why that's occurring? And then what's happening with that piece of paper -- I think it was $300 million to start, and I've seen it gone up to $307 million. I don't know how much of that is accounting versus actually accrued interest on your note.

And how are you going to deal with this? It's an 8.5% piece of paper, 6% of your FFO? Clearly, that's going to create some headwinds once it does become redeemed, both from a debt to EBITDA perspective, but also from an earnings perspective. So maybe you can just talk about it overall. Thank you.

Sure, Michael. This is Luke.

So with regards to the asset sales that have happened to date, the original deal was that the first tranche that we knew and we allocated to sell, that there was no initial pay down of the preferred. So the preferred was sized in the capital structures of that first tranche of assets would be sold and then proceeds paid out to common, which is DDR and Blackstone.

Going forward, we would expect that to change. As we continue to prune that portfolio down, we'd expect to see that preferred reduce. However, I would like to note that we are in a partnership with Blackstone and sales do need partner consent. So I think that was one thing that I would like to make sure people are aware of that we work with our partner, we have identified a group of assets that we will likely sell in next year and that is probably likely to pay down the preferred.

With regards to the preferred going from $300 million to $310 million, the actual preferred is priced at 8.5%. You're right, but 6% is payable in cash, 2% is payable in kind. So the preferred slowly increases a small amount every year. That is consistent with prior Blackstone deals that DDR has done, and we feel very comfortable about slowly letting that increase.

And then the final point of your question is really with regards to the conversion, or the reinvestment of the 8.5%. I think probably the best way to point that out is the historical first two transactions with both had preferred equity investments. We have successfully been able to reinvest that capital into a takeout of Blackstone.

I don't want to preempt anything happening in the near term with them; however, we do have a very, very good relationship with Blackstone. We do like a significant portion of the value of that portfolio and would see that the $310 million, which is probably going to reduce over the next 12 months, would be reallocated into common equity or wholly-owned assets in the medium term.

Next we have a question from Jeremy Metz of UBS.

Good morning, guys. It's actually Ross Nussbaum, here with Jeremy.

If I think about the industry for a second, do you think that industry occupancy has peaked? I look at this year, I see two big Grosser bankruptcies on the coast. I look now ahead to the next year and think about the future of Sears and Kmart and a couple electronics boxes, for example. Do you think that we're in an environment where we actually could see both your occupancy, as well as industry occupancy slip a little here, over the next 12 months or 24 months?

No, I really don't, Ross. I would look at full occupancy for us and most of our peers as being closer to about 96.5%.

Obviously, we talked about some of the deals we're making where we're taking tenants out and replacing, which are not going to be reflected in an increase in leased rate, and may even, short term, if there is a lag in expiration or termination and lease signing, result in a little bit of a decline in the leased rate. But all for the good of the long-term growth and driving the value of the asset.

Even with some of the potential bankruptcies and bankruptcies you mentioned, in our portfolio, for example, we had just one A&P, and we're not going to have any problem backfilling that, should that be rejected. It has not yet been rejected. And we might see a quick slip, because it's a larger box, but we'll fill it quickly.

I'm still looking at a full occupancy rate of, again, somewhere north of 96%. It's lumpy quarter-to-quarter, as I explained in the script, based on some of our actions.

But the little bit of whether there's an electronics -- and again, we don't really see that as a real potential for near-term bankruptcy -- it's been pretty good in our sector, quite frankly, in terms of bankruptcies. I don't think we're going to see this thing slip. Again, you'll see some lumpiness, but I don't think you'll see many of us slip beyond our current levels.

The broader question, from an overly macro standpoint, is a very tough one for us, when you look at the 4 billion or so square feet in the total database that the national brokers will talk about. I understand your sensitivity on that question. But I think, exactly as Paul was saying, when you look at the higher quality portfolios like ours, we certainly don't see any of that risk, even if on a true macro basis you might be able to make a bit of a case that you've outlined.

Our next question is from Paul Morgan of Canaccord.

Hello. Good morning. Just maybe a little bit more on the dispositions, as you think about 2016.

If I look at a couple of the deals that you sold in the last quarter are in some larger markets, Tampa, DC. And how should we think about those sales?

We're used to thinking of your dispositions as being not necessarily tertiary, but at least in the secondary markets. Could we see more in major markets, as you see them maybe being flat assets going forward? And is that changing what you see as your longer term pipeline?

Paul, it's Luke. And I think that's absolutely what you expect to see.

I think we have exited from definitely a percentage of value out of predominantly nearly all of our tertiary markets. And you will start seeing us sell what we would consider prime minor assets, whether they're in Tampa or St. Louis, markets that we like but we just don't see that have the growth profile that we feel we can reinvest our capital into our prime plus portfolio.

I guess a really good way to think about that is between 2008 and 2013, we sold over 300 assets for about $2.9 billion. So a little less than $10 million per asset. Right now, we've got -- at the end of the third quarter, we had about $270 million under contract, with 10 assets.

So the size of the asset that we are selling is two to three times larger than what we've done historically, which goes to show not only the quality, but the size of the assets where we're rotating out of them. And obviously then, the reinvestment side we are obviously buying bigger, more dominant power centers, like Willowbrook we acquired earlier this year.

The next question is from Craig Schmidt of Bank of America.

Thank you. I'm going to assume there's a continued aggressive transaction market, and therefore, you'll continue to make dispositions. And I see three buckets as use of proceeds, buying prime assets, investing in your redevelopment pipeline, and paying down debt. I just wonder, which of those few buckets will see the most activity?

Craig, this is Luke. So I think we do -- as David highlighted, we do have an active redevelopment pipeline. So we have about $100 million to $150 million. So that is something that we can allocate to.

I think then really the residual bucket's going to be, particularly in the near term, between debt and new acquisitions, I think very short term, is paying down debt. But we do still feel that we can find attractive and attractively priced opportunities to acquire new centers. We do have confidence that we can get to our $250 million for 2015. We're at $160 million at the end of the third quarter.

And I guess our two acquisitions for the year highlight our platform and our ability to find assets where we feel we can either re-tenant and create value from mark-to-market and rent, or opportunities where we find redevelopment opportunities in new acquisitions. So I do think, I guess we do have a redevelopment bucket lined up for the next 12 months. And then it's going to be somewhat short-term debt, but we do feel that we're going to be able to reinvest that over the next 12 months.

Okay. Thank you.

You're welcome.

The next question is from Tayo Okusanya of Jefferies.

Hello. This is George on for Tayo.

Now I understand the use of proceeds and the desire to de-lever from asset sales. But I don't know if I caught this earlier, but how would you view also potentially repurchasing stock, given where the stock is trading relative to NAV and where it has traded? And at a certain point, does it become attractive to actually do a share repurchase?

We're certainly open to it. We've discussed it at the management level, at the Board level. We've discussed it even with shareholders, at times.

So far, we believe we've taken the prudent first step, which is raising capital through selling assets in a hotly priced private market. We've done a bit of that. There's considerably more under contract and we expect to be on the way over the next quarter or so. And if the market stays this hot, likely over the next year or so.

Initially, I think those proceeds go to the pay down of debt. But I absolutely believe that that creates the capacity, if we should continue to trade at a discount to private market value and an extreme discount to peers, that that capital could certainly be used for share repurchase. So nothing formal to announce today, but certainly something that's being discussed and advanced.

The next question is from Alex Goldfarb of Sandler O'Neill.

Good morning. David, one of the things I think you guys have been vocal about in delivering this year is laying out a guidance range and then achieving that despite what's going on on the capital markets front.

From your opening remarks, just want to clarify and confirm, while you're not giving 2016 guidance, the intention is as you guys ramp up, continue to do dispositions, the focus is still going to be on growing earnings, not growing FFO for FFO's sake, like historics way back when. But the point is that you guys will seek to deliver a steady-state earnings growth that investors can bank on while also doing the normal course dispositions. Is that the correct way that we should look for the 2016 guidance when it comes out?

Obviously, the formal press release with guidance and normal investor and analyst follow-up that we do will be in early January. But we do think today that, despite the fact that our overwhelming focus is net asset value creation over time, and we do believe that asset sales in today's environment are key to that, that we should still be able to deliver earnings growth as we look out over the next year and next several years.

So I don't think that's growth for the sake of growth. I think that's a testament to the strength of both the existing portfolio, the strength of our ability to source some level of off-market, opportunistically priced acquisitions. And certainly mitigated somewhat by what we think is a considerable opportunity to sell more assets than we buy in the current market.

Our next question is from Ki Bin Kim of SunTrust.

Thank you. Just a couple of cleanup questions. Could you just describe the rent per square foot for the assets that you've sold this quarter, and the cap rates, if I missed it?

And second, in terms of Puerto Rico, is there actually a healthy bid to sell those assets, if you wanted to? And at what point do you consider that as part of the overall pool of assets that you eventually want to sell from your portfolio?

Hello, Ki Bin. It's Luke. So I'll handle the first part on the transactions, then hand over to Paul for Puerto Rico.

With regards to the cap rate, it was a low to mid 7% for the quarter, for Q3. However, looking forward, I think we're probably going to be in that range -- we still have to sign the contract -- potentially even a little better.

With regards to the AVR per square foot, it was probably a little lower, in the main. I think it was low double digits compared to where we currently is our portfolio track, which is significantly above that, more in the 14%. I think some of that 4% growth year-on-year has been driven not only by just the prior quarter, but the year-to-date sales and the lower AVR that we're selling.

Ki Bin, it's Paul. On Puerto Rico, we're long-term holders and owners.

And I think part of what's missed as people talk about Puerto Rico is the event we're having right now, it's a significant down in the cycle, but we've seen it before. I think the couple of deals I mentioned, Dave and Busters, H&M -- and there are others that we haven't signed yet, so we can't announce -- retailers look at it at the same way we do. This is a long-term, strong retail market. And while we all are focused on the downs of today, that is not how we're looking at it and certainly not how the retail community is looking at it.

Next we have a question from Haendel St. Juste of Morgan Stanley.

Good morning. Thanks for taking my question. Another question on dispositions for you, David, here.

Obviously, you guys have been very active in recent years. And I understand that you've changed the quality of what you're selling and are selling more opportunistically, at this point. But I wanted to get some insight from you on the pulse and tenor of the transaction market for what you're selling.

Have you noticed any change in demand or pricing in recent months, given tightening of the CMBS market terms during the late summer, early fall? And then also, how does demand, the number of bidders and pricing, say, compared to maybe three, six months ago? Thanks.

Haendel, it's Luke. So with regards to what we're saying, I don't think we're seeing any dramatic change, and I do acknowledge that overall borrowing rates and cost of capital has increased from three to six months ago. We saw that just from our recent issuance, although not at the widest point in the market, but clearly debt costs have increased.

I think one thing that's helped us is that the assets that we are selling are institutional. So institutional buyers are considerably more cash invested, so the amount of leverage they need is a lot less. I do think we will start to see maybe some impact on that lower quality portfolios that have been traded, where it is heavily driven by where CMBS pricing is, or CMBS debt marks are.

With regards to the number of bidders, we continue to see, and we do have a few things particularly with partners that are being looked at from buyers. We continue to see a significant number of bidders undertake due diligence and bid on the assets. We continue to see more and more of the real estate advisory firm seeking to grow their platform and footprints, and they have raised considerable amounts of capital over the last 12 to 18 months. And we continue to see them focus on buying what we deem institutional quality, but just not prime plus asset from DDR.

The next question will come from Mike Mueller of JPMorgan.

Hello. Just a quick clarification and then the question. But when you were talking about being a net seller in terms of dispositions, is that a comment just on your portfolio before any JV sales, like Blackstone, or was that encompassing it?

Mike, I think that's going to be both. I think DDR will be a net seller on a wholly-owned basis for the year.

And then when you add Blackstone, we'll be a slightly larger net seller. Although DDR's pro rata share of the Blackstone sale of $213 million is only 5%. So our pro rata share in the numbers we're quoting is only $10 million.

The next question is from Jim Sullivan of Cowen Group.

Good morning. Thank you. Question for you, David, kind of a follow on from the earlier question regarding share buyback and whether that's on the menu of things you might look at.

The question I have is that with your commentary on cap rates today, I'm curious how you think about the margin on, the value creation margin on your external investment, either in ground-up development or perhaps value added acquisitions, take your choice? What do you think that value creation margin is, given where terminal cap rates are, and how you think about that as an alternative to share buybacks?

Yes, Jim, we certainly think quite a bit about that. It's not just in the script that the focus on capital allocation is significant. So it is a very regular exercise, in an extreme point through portfolio reviews, but on a much more regular basis than that, to say, where should we putting the next dollar of capital?

Does it go back to shareholders in one form or another? Does it go into acquisitions, redevelopments, debt repayment? Do we try to find new ground-up opportunities? And so it is a deep focus.

I think different than a few years ago when we acknowledged, one, there was just a capital raising requirement associated with asset sales, and two, there was a need to clean up this portfolio. Today, it's a focus on exactly where every dollar comes from, what that costs us, and where that dollar goes, even to mid-to small level leasing decision that I think ended up resulting in higher net effective rents this quarter than we reported in long period of time.

And so I do think when we look at the overall scope of opportunities that while we can certainly say it is a very aggressively priced transactions market, that we do think we can find some value add acquisition opportunities. We cap to the team, with making sure every deal that we buy is effectively a case study of how we can create value, that it can become a slide in the investor presentation of here's how we bought Willowbrook in Houston, when people disliked the overall market and when occupancy was 10 percentage points below what we thought we could achieve over time. And then we need to execute on that.

Or opportunities to grow within a certain sub market where we think we increase our pricing power, opportunities like the one in Philadelphia last year, where we're buying, where we've got a tenant in our back pockets and we're simply underwriting the assets and the small vacancy there different than anyone else. And so I don't think we want people to believe that there aren't acquisition opportunities. We just believe that the disposition opportunity in today's market is greater than the volume of acquisition opportunities.

That's different than only a few years ago, where we were a significant net acquirer in a market that was priced very differently than the one today. So I do think you will continue to see us find some volume of attractive value added acquisition opportunities that we talked about earlier through the portfolio review process, certainly looking to backfill or even grow the redevelopment pipeline, and believe that that will continue to be a very attractive use of capital.

And then finally, on the ground-up development side, as we complete these final two legacy projects, we certainly look around for other opportunities, but so far just haven't found ones where the risk-adjusted returns at all justify our capital. And so I'm happy to say that we will continue to actively look there, but can't point to any additional activity on that front today.

The next question comes from Jason White of Green Street Advisors.

David, just going back to your previous comments, you talked about your development pipeline, if you will, that you're continuing to look for opportunities. It seemed like a little bit of a change, where before you were evaluating how you thought of development as a business and whether it was worthwhile to even have a development platform. Has that been a change of tact, or can you walk through the slightly change in the message there over time?

I did not mean it to be a change in message. I think, for us, we absolutely believe having a development capacity is extremely important, whether it's ground-up or whether that's reflected in constant really seeing, at small scale and hopefully some larger scale, redevelopment opportunity. And so I don't think we've meant to downplay that.

I think in some ways, when we talk about the legacy development pipeline, we have clearly meant to downplay the returns associated with carrying land for too long a period of time, and even a write down on some of that land earlier this year. But the overall capacity, we believe to be critically important.

But like with everything else, it's a returns driven business. And we will allocate capital where we think we can make the most money for shareholders. And so it's something where we don't see great opportunity today, but certainly not looking to downplay that capacity within DDR.

Our next question comes from Rich Moore of RBC Capital Markets.

This is James [Bammert] calling for Rich. G&A was notably lower this quarter. Is that due primarily to staff reductions? And if so, what areas of the business do you plan to scale back the most?

No, not due to staff reductions. I think overall, we identified early on opportunities to operate more efficiently. We've recognized those quickly. And you've seen in the run rate recurring G&A, I think, changes that have been able to be implemented pretty quickly and have been consistent this quarter to last quarter, although certainly lower than last year.

So no staff cuts of note, no departments being focused. I think there's a high level of excitement and encouragement to the employee base and from the employee base where we're operating more efficiently, but not running around saying, how much smaller does the team need to be?

We've got an exceptional and deep team and we're excited to keep them around. But to still be able to operate with a little greater level of efficiency and pass those savings through to bottom line earnings and to shareholders.

The next question is a follow-up from Michael Bilerman of Citi.

I just wanted to make sure I got the trajectory right in terms of asset sales, as well as G&A. So just from a net sales perspective, Luke, I think you mentioned $90 million more of acquisitions that you have full confidence will close in the fourth quarter. And you announced a couple weeks ago that you have $268 million, your share of assets to dispose. So call it a negative $180 million in the fourth quarter.

And I think you guys have talked numerous times on the call now about being a net seller in 2016. I just don't know the magnitude. Is that $500 million? Is it $250 million? Because both would have a pretty dramatic effect on your -- and I respect the focus on NAV -- but clearly from an earnings perspective, as you pay down cheap debt, would be quite dilutive.

And then I think from a G&A perspective, you're on the $70 million run rate, if you're done with all the efficiency saves, I assume now we'll be back to a more pressured labor type of cost and just a continued now rise from this level on a more modest basis, again, as we think about next year.

Absolutely, Michael. I think probably the easy way to look at this year is if you look at the assets under contract and the ones that have sold year-to-date, I think we're a little above $600 million. And this year, we're buying around $250 million. We're probably going to be a net seller in the magnitude of around $400 million for the year.

Next year, I just want to highlight what Dave said in his comments and what I've outlined, it is truly opportunistic. So if prices remain high, I think we will be a net seller. However, not to a smaller magnitude than what we are in 2015. What that number is, it's hard to say.

If we continue to see 10 to 20 credible bidders bidding on assets that we feel is being overpriced compared to our internal valuation and our return on capital, we will absolutely take advantage of that. Pricing changes, we may not be a large net seller at all looking into next year.

So I think, where we sit now, we're comfortable and we have very clear visibility until the end of the year, looking into next year. From a wholly-owned basis, it's going to be driven by pricing with partners. And going back to your earlier question on Blackstone, clearly we do need to engage -- and we are obviously always engaged with our partners, looking over their portfolios. But there is a partner involved on when they choose to execute on dispositions.

With regards to paying down low coupon debt, I just want to highlight that next year, we do have 9.625% paper. I wouldn't consider that low coupon for us. And I think we will be paying that down, so that significantly reduces the FFO dilution from any net dispositions.

But I do believe as we focus on an appropriate risk profile, paying down some element of debt with EBITDA growth will lower debt to EBITDA to the range which we are clearly trying to operate in, which is a turn lower than where we are today.

With regards to G&A, you are right. It's probably in that low 70%s. I do think that there is a slight upward revision from that, looking out into the future years. You do make the reference that (Inaudible), but I do think that will come up, but it will be lower than what the historical run rate was for DDR.

The next question is from Chris Lucas of Capital One Securities.

Good morning, everyone. Going back to the Blackstone partnership, I guess I'm trying to understand, maybe give us some color on the dynamics underlying that and your options as it relates to the ROFO on the 10 assets and when you thought the term of that optionality would be?

Is that something that is still many years out? Or is that something that's going to be something that you guys are going to be looking to execute on over the next year or two?

Chris, with regards to the dynamic, I think the relationship remains very good. We continue to review transactions, new transactions, and new investment opportunities with Blackstone. But they have acknowledged, and we've acknowledged that our portfolio and our focus on the quality of the real estate means some opportunities don't fit our long-term strategy.

With regards to the third joint venture, we do have a ROFO, a right of first offer, on 10 of the assets, which make up a considerable amount of the value of the portfolio. With regards to timing on that, it's clearly going to be dependent on when we feel it's appropriate for our cost of capital. But also, it's up to when Blackstone deem that they want to exit and feel that they've made the return that they warrant for their investors.

So I do feel where we sit today, we are in a very good position to be able to acquiring a number of the assets that we feel would fit very well in our platform. And I want to remind everyone that when we do that, obviously the underwriting is extremely easy and we have de-risked that portfolio and the knowledge of the assets help us on reinvesting the capital. But right now, I would say it's a few years out.

Although the portfolio was acquired at an extremely attractive price looking at today's market, the assets we sold, which was the bottom tier, is 20% above what we felt we acquired it for. We do feel like there's some additional portfolio training to do with Blackstone before we feel it makes sense to take Blackstone out.

And this concludes our question-and-answer session. And the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.