Site Centers Corp (SITC) 2016 Q2 法說會逐字稿

Good day and welcome to the DDR Corp. second-quarter 2016 earnings call and webcast.

( 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 afternoon, and thank you for joining us.

Today's call will be led by President and CEO Tom August. Please be aware that certain of our statements today may be forward-looking. Although we believe that such statements are based upon reasonable assumptions, you should understand that 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 filed with the SEC including our form 10-K for the year end of December 31, 2015.

In addition we will be discussing non-GAAP financial measures on today's call including FFO, operating FFO and same-store NOI. 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 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, Tom August.

Great. Thank you.

First of all let me apologize to everybody for the glitch this morning. It was a system failure by our service provider that unfortunately we couldn't control, so we were as frustrated as you were. It clearly is not the way I wanted to begin my tenure here at DDR. We understand there were a number of other companies that experienced the same problem, so again I apologize. I know at this time of the quarter you are all pretty busy with a number of calls and this is probably pretty disruptive. But, again, not much we could do.

So let me start where I thought we were going to be four hours ago with introducing the participants who will either speak during the call or certainly be available here to answer your questions. Paul Freddo, senior Executive Vice President of development and leasing, I think most of you know Paul pretty well.

Secondly Vince Cornell, Executive Vice President of development and leasing. Vince just joined us in two weeks ago on the same day I did. We will be working with Paul. I'm going to let Paul explained Vince's background and how they are going to work together in this transition period. But suffice it to say we're really happy that Vince is with us.

Christa Vesy is our chief accounting officer, interim chief financial officer, Christa really stepped up when Luke left and has then done a lot more in the last two weeks since I've been here so I'm certainly glad she is here. And Matt Lougee is here with us and Matt is sort of our senior Vice President of everything. He does a lot of different things and today you probably recognize him mostly at the Investor Relations person.

So with that, what I'd like to do is a couple things. Number one, I want to start off with some observations that I've made in the last couple weeks year at DDR, the actions we're taking, the results, and I don't think there's major shifts in our strategy, but there are some changes that I will outline for you. In terms of observations I think the day to day operations are running really well. You know, you can use whatever analogy you'd like.

The engine running fine, the trains are on time, but things are going well, and as I reflected on the history of the company, it seems that the accomplishments have not been totally, but partially overshadowed by the, to be honest disruption, at the top of the organizational chart. And I'd like to give you a few examples, and before I do, I know that there are a lot of companies that have upgraded their portfolios over the last few years. I would suggest to you however that if you think where we started in 2010, the hill we climbed was a heck of a lot steeper than most companies. So just again bear with me with a few examples.

We sold 378 assets for $5.2 billion, we've acquired 201 assets for $7.7 billion. I think impressively we've turned over approximately 75% of the gross asset value of the company, we've reduced of the asset count by 48% from 665 to 349 properties. We've increased the asset size 52% from 221,000 square feet to 322,000. And we have exited 15 different joint ventures.

And I think on a softer side, hard to measure, I think the quality of the tenant base and the locations have improved significantly over this time frame and that's ancient history when you look at where we are currently. Our same-store NOI has been greater than 3% for 15 of the last 17 quarters. Our current occupancy is 96.1%, and we still think there's noticeable upside both in the small shops as we mark to market and in the releasing of the Sports Authority space I'm going to let Paul talk about a little bit later on. Spreads have been good. They have been increasing from a high teens to the low 20s, and this quarter they are actually 28%. So again I think overall a great solid foundation from the tenants in the portfolio perspective.

So what are we doing now? What we're doing now is mainly for my benefit to get me up to speed on the company, and I hope I've created a real sense of urgency here, because we're doing a complete review of the entire operation, starting with the organization, the structure, the policies, the procedures, the culture, what needs to be changed, what needs to be modified, what can we do more efficiently. Just as an example we are a highly centralized company, probably more centralized than most of our competition. Is that the right thing? The wrong thing?

We think it sounds good because it's a concentration we have with the major natural tenants. But again it's everything we are looking at. I have temporarily through Labor Day put a hold on all additional mid and senior-level hires of the Company. I think it's just important before we add to the staff, I just want to make sure I understand what our structure is going to be, what the appropriate qualifications are, people in different boxes and then we can look inside the company as well as outside. So it'll be a temporary hold but it's on hold for the time being.

I've made two exceptions to that rule. Number one we obviously hired Vince. Vince was in the queue when I first started. I had the opportunity to interview Vince well before I thought I was going to be the CEO of DDR. I was very impressed with him and obviously recommended hiring him and I'm glad he's here.

The second is additions to our Board of Directors, and this is not in my purview directly. It's really up to the Board and the nominating and governance committee. But with the changes that have occurred over the last 18 months or so, with my now been part of management and not an independent trustee, we're down to five independents with three different committees, it's kind of tough to staff them, so we will be adding to the Board, and I hope that the qualifications of the new member will be from a different perspective to help not only the Board about help me and DDR team better run the Company.

From the assets side, it's great timing and because we are just beginning the budgeting process. We're looking at each asset, asset by asset, one by one, the market, the location, the quality, the tenant, the growth rate, the risks, the opportunities, do we really want to own this asset in 5 to 10 years?

And one of the things that's become apparent and I will tell you upfront this is -- we are at the very beginning so I don't want to go overboard on this. But it appears like there are more development and redevelopment opportunities than we had originally focused on. And I think this may be somewhat of a little bit of a shift in strategy. The last couple of years it seems like we have been focused on high barrier to entry, good quality properties which is great, but I think we have the capability to add value to a lot of properties through the redevelopment efforts, not only of our existing portfolio, but assets we may add. So I want to continue to focus on high-quality, interior -- excuse me -- infield locations, but also a greater emphasis on within our portfolio and acquisitions on value added opportunities where I think we can become more of a value creator then just an investor.

I've tried to visit a number of properties. Done that on the weekends, lunch hour, and on stopovers. So I've been to Chicago, to see a few assets there. I visited some of the assets in Dallas. I visited some here in Cleveland, and I've got a trip to Denver scheduled next week to meet our team in Denver and review some assets out there.

From a capital markets perspective I think we're in good shape. We have nothing that we can do either opportunistically or we need to do in the next 90 days or so. There's some refinancing opportunities in 2017. We will begin to look at those towards the end of the year, but I think we are -- enough on our plate right now and I'm glad that we can push that off for another 60 to 90 days. In terms of major transactions, again, -- excuse me -- Paul is going to talk about Sports Authority. I think that has turned out better than we had originally anticipated. In terms of upstate New York those assets are still under contract; we expect a third quarter close.

We are looking at Puerto Rico. We have developed and we're developing for our Board of Directors meeting, which is the day after Labor Day, sort of an overall strategy session of what we want to do in Puerto Rico. I know we've not been very clear to the marketplace about what our strategy is there. We're going to focus on that. Hopefully will get an answer from the Board and will be able to articulate exactly what we want to do in Puerto Rico.

While we're looking at all our assets were also creating another list of priority assets that we may want to sell in addition to or in place of, or in lieu of some of the ones we are already thinking about, so we are doing that priority list as we look at each asset. In terms of joint ventures, there are two that are up front and center. One is one that we call Manatee, it's a 55 asset fund with six other funds in it. We have 20%. It started in 2007. It's coming up on its 10-year life. So those assets will probably be sold. I'm guessing it will be a late fourth-quarter or probably into the first quarter sale. There are two factors I think people need to think about on that venture.

One is we collect $8 million-$10 million of fees and that's over $0.02 to $0.03 per share in fees, but I think more importantly we have a right of first refusal on any assets that are sold. So, given that flexibility, we are just looking at all of the combinations and permutations of what might be best with DDR with that portfolio, from letting it wind down and selling it, to buying a few assets, to buying the portfolio with others who might take assets that are not consistent with our strategy. Again I think that's something we're working on right now. We'll just follow that as the sales process proceeds.

The second is the Blackstone joint venture. $2 billion investment -- the $2 billion investment total. We have 5%. We have obviously a lot of preferreds in there, which I know you talk about quite a bit. We don't control that sale.

There are some assets that we might be interested in. We don't control the sale process, so we're hanging around the rim to see what happens and see when something does happen we can take advantage of it to DDR's benefit. And then of course what we're doing is taking all these the combination permutations, trying to add them up, subtract them and see how it affects our balance sheet, mainly our leverage and our NAV, but also we recognize the hits that it may be to earnings, and were just trying to look at that and balance of the best way that we can.

I'm not sure that any of you are expecting guidance for 2017 on this call. But given that I've been here two weeks, given all that's up in the air, we certainly are not prepared at this point to give that, we'll do it at some point in the future.

The other thing I'd like to talk about is the role of JV's and with DDR. I think joint ventures certainly play a role in our capital structure. But on the -- especially from time to time given our cost to capital, but on the other hand, there's only 24 hours in a day and it's someone once told me you only have so many mental calories to spread, and I'd like to spend our mental calories on assets that create the best value and the most value for DDR.

I think the fee income is great. But I'm more interested in creating value at the asset level. So again I think joint ventures have a place at DDR, but we need to be a lot more selective than we've been in the past.

So what are we trying to do? What we need to do is finish up this transition period and what I call phase 1 of our transition story. It's been a long slog. We've been at it for six years. We've done a lot.

We've got some to go. We need to sell some assets, we need to get our debt down a little bit, and we're probably a little bit late in the game. But we're moving ahead and we're going to get this done pretty quickly.

And then what we need to do is think about how we are now thinking about joint ventures, how we're now thinking about Puerto Rico, how we're now thinking about redevelopment and develop, articulate, and begin to execute on a longer-term strategy that shows our constituents. Starting with our employees, our shareholders, our partners, why you should own, continue to own, or own more of DDR stock. I think we've got a great floor as I said at the beginning of this presentation, and I think we now need to take our eyes off the floor and begin to look up to the ceiling to see how high our upside is.

I just like to get my little pitch here with one comment. As you can appreciate over the last two weeks, there has been a lot written about the change in the CEO role here at DDR and one of the comments is that I personally don't have retail experience. And I -- you know, that's a valid comment. I've been in the real estate business for 44 years, most of my experience has been in office and to a certain degree, lesser degree than that, in industrial. But I don't think, as I said yesterday is that retail expertise is a pressing need for DDR. You know, when I see Vince joining us, working with Paul, a very long transition period, the rest of the staff we have here, Paul's team, I think we're in great shape.

Now that's not to say look at -- I want to tell you right now we can always use good smart motivated people, retail expertise or not. So if you know any good smart people who want to join DDR tell them to call me will find a great place for them. We are going to give them a great opportunity. But retail we are set.

The need here in my opinion is stability, at the CEO level, filling a few senior positions we have, leadership, and developing a strategy that again, to convince you why you should own this company. So I will learn the retail business. I will work hard. I'm going to do my best to deliver on those promises and what we need at DDR today, so thank you.

Paul.

Thanks, Tom. I would first like to elaborate on the announcement of Vince Cornell joining DDR two weeks ago as our new Executive Vice President of leasing and development. Vince has been in the retail and real estate industry for nearly 25 years and brings a wealth of knowledge about the retail sector after previous roles as senior vice President of real estate at Dick's Sporting Goods, Saks, and The May Company as well as Vice President of development at Forrest City. He is an extremely well-known and respected figure in the retail real estate industry with extensive retail and landlord contacts.

Vince will report to our CEO, Tom August and fulfill our succession plan with the optimal candidate. As I wind down my tenure here the company through the first half of 2017, my plan is to familiarize Vince with our portfolio, our people and our processes in order to ensure an orderly transition of my duties to Vince upon my departure.

In fact next month we will conduct our multi week portfolio review process in order to analyze the strategic plan our long-term prospects for each asset. Given Tom and Vince's recent start will also use it as an opportunity to introduce them to the portfolio and further develop future growth opportunities across the portfolio. We are excited to have Vince on Board and we fully expect that you will be as pleased as we are with his knowledge of the business and his ability to sustain and improve upon our consistently strong operational results.

Turning to the quarter, I was very pleased with the performance of our team and the results they delivered and equally as pleased to see how the math of the portfolio upgrade continues to flow into strong operating metrics. We produced a same-store NOI growth of 3.1%, which consisted of domestic NOI or 87% of the same-store pool growing at an impressive rate of 3.7%, a tribute to the strength of the portfolio after our multi-your transformation. Puerto Rico, same-store NOI was negative 0.5%, an improvement from last quarter but still causing a drag on the overall same-store NOI figure by approximately 60 basis points.

For the year we see no shift in our original same-store guidance range of 2.5% to 3.5% inclusive of the Sports Authority impact, which I will discuss shortly. Year one rent per square foot on new deals which totaled 430,000 square feet in the quarter, was in excess of $20 per square foot, and the second-highest starting rent on new deals in the company's history. Inclusive of renewals, the blended rate per square foot with the highest total in five quarters, and 17% above DDR's average rents signed since 2009.

While the composition of our portfolio was a disproportionate amount of box square footage, it does not compare favorably to other retail property types in terms of in place rent, the continued upward trend in starting rent is material and indicative of the portfolio upgrade. As you have seen from DDR over the past few years, we have not chosen the path of simply buying shopping centers with attractive demographics or high in-place rents, as these characteristics alone do not directly translate into value in the private market. Instead, we have sold weak assets and bought prime assets with attractive growth, regardless of in-place rents. As a result, we have grown the rent per square foot of the company at an annual rate of over 4% through both organic growth, which was evident this quarter after selling lower quality assets. We would expect a continued upward trajectory of this metric in future quarters.

The lease rate for the quarter was flat on a pro rata basis at 91.6% as we absorbed two rejected Sports Authority leases. However we continue to show great progress leasing small shop space with a 20 basis point improvement over the first quarter and a 170 basis point improvement year over year. We continue to be encouraged by the number of new credit worthy concepts looking to expand into small shop space, and expect that trend in addition to fewer move outs to continue to positively impact net absorption for our shop space.

The final two points I would like to address on the quarter are in regards to new lease spreads and the bumps associated with those leases. In the second quarter we achieved a new deal spread of 28%, the highest on record for DDR in 30 quarters. Recent trends in future expectations point to continued spreads in the mid to high teens or low 20% range on new leases, and high single digits on renewals. Additionally, the 103 new leases signed in the quarter have a compounded annual growth rate of 170 basis points, significantly higher than the portfolio average of approximately 125 basis points, and representative of the very focused initiative from our leasing team to drive annual increases beyond historic norms and provide a future benefit to same-store NOI.

Turning to the Sports Authority news, as you know the retailer filed for Chapter 11 bankruptcy protection in March, and was the first sizable bankruptcy in our space in recent years. The eventual liquidation highlighted the dramatic shift occurring in retail, and the difficult environment for achieving and sustaining a both profitability and relevance to the consumer. On the bright side, the bankruptcy provides DDR with an excellent opportunity for us to showcase not only the work we have done in recent years reducing exposure to weak credits, but going forward it will highlight the quality of our portfolio as we make progress on backfilling the 13 boxes.

Regarding our exposure, we had 12 boxes in wholly owned centers and one in 5% owned joint venture, totaling 70 basis points of pro rata base rent, well below the sector average. All 12 of the wholly-owned boxes are in prime or prime plus centers with seven of the 12 in our focus 50 prime plus portfolio, such as Shoppers World in Boston, Perimeter Point in Atlanta, and Midtown Miami. Demand for this space is robust, highlighted by the purchase of the designation rights by Dick's sporting goods, T.J. Maxx, and Burlington, of four of the Sports Authority leases during the recent auction process. Despite our minimal exposure having four designation rights to purchased, was the highest amongst all of our peers and indicative of the quality of these locations.

We expect Sports Authority to return the remaining nine locations it to us in the immediate future, and we do not expect to receive rent there after July for those rejected locations. This will cause downward pressure on second-half 2016 same-store NOI to the magnitude of approximately 80 basis points in the third quarter, and 100 basis points in the fourth quarter and first half of next year. As I mentioned previously, this impact is and has been contemplated in our full-year same-store NOI and FFO guidance.

I would also like to note that in the first quarter, we did not reserve for the majority of March rent as we expected the balance to be collectible at the conclusion of the bankruptcy process, and our position has not changed. We look forward to updating you on future calls about the releasing of the remaining nine boxes, as our leasing team versus best in class sporting goods, off-price apparel, beauty, and specialty grocery retailers.

Next I would like to briefly address Puerto Rico. While we are encouraged with the recent progress made by the US Congress to intervene, there is little new news to report on a micro level that is material, although we did see a 100 basis point improvement in same-store NOI since last quarter. As Tom mentioned, we are reviewing the overhangs such as Puerto Rico, that are associated with our company, and expect that senior management and the Board will conclude on the most thoughtful path for shareholder value creation over the long term.

With that said our leasing and development teams remain laser focused on maintaining cash flow stability, and even exploring ways to grow on the island, such as the $12 million expansion of Plaza Del Sol to accommodate the island's first Dave & Busters, and the island's second H&M, which will be opening this quarter also at del Sol. We remain encouraged by the health and sales of the majority of our tenants and will continue to provide updates on asset level performance going forward.

The final item I will discuss is our development pipeline. As you will see in our supplemental, we have transferred Lee Vista Promenade in Orlando to operational, as of the vast majority of the project is now online. We are encouraged to report that our legacy pipeline now consists of only Guilford Commons outside of New Haven. 97% of the estimated cost of $69 million has been spent, and 70% of that spent has been placed in service, with stabilization expected in the fourth quarter of this year. While centers like Guilford and Lee Vista are high quality prime shopping centers that DDR will own over the long term, the dilutive returns associated with these deals are sub optimal and we're pleased to report that we are quickly approaching the end of that legacy pipeline.

Additionally in the second quarter we also sold a parcel of land in Jupiter, Florida that was originally slated for ground-up development. This sale is an example of how we will continue to chip away at the legacy land bucket, which currently consists of $44 million of non-income producing assets, all of which are being marketed for sale. As a result, we are pleased to report that we have decreased the amount of consolidated land and CIP as a percentage of gross asset value from 10.7% in 2008 to merely 1.7% today, a change that significantly decreases our risk profile and ties up much less of the balance sheet in non-income producing assets.

Notwithstanding the conversation surrounding legacy development, we will continue to move forward with our redevelopment pipeline, which provides us with over $100 million of spend annually at attractive returns in the 9% to 10% range, and additionally pursue a strategic discussion with Tom, Vince, and the Board regarding where ground up development fits in DDR's strategy going forward.

And I will now turn the call over to Christa.

Thank you, Paul.

For the second quarter, operating FFO was $122.4 million, or $0.33 per share, which is a 6.5% increase over the prior year. Including our nonoperating items, FFO for the quarter was $120.3 million, also $0.33 per share. Nonoperating items related primarily to land sales.

During the second quarter we also received approximately $3 million of additional management fee income related to the amendment of our asset management agreement with one of our joint venture partners, that provided for a one-time payment upon execution. This payment is a non-recurring event, and recurring quarterly fee income for the remainder of the year should continue to be in the range of $8 million to $8.5 million, which is in line with our original guidance. When adjusting for the wind down of our commingle joint venture, the DDR domestic retail fund which is predicted for year end 2016, recurring quarterly fee income should be approximately $5 million.

Additionally, as Paul discussed in detail, the timing of Sports Authority's auction process pushed all rent loss associated with that bankruptcy from the second quarter and into the third quarter. Given both of these items, as well as the slight delay in the closing of our asset sales that are under contract, we are increasing our full-year operating FFO guidance range by $0.02 at the midpoint to a range of $1.23 to $1.26 per share.

Turning to transactional activity, we closed on the sale of three operating assets and three land parcels for $58 million at our share during the second quarter, bringing full-year dispositions to $282 million, with an additional $505 million under contract. All of the operating assets under contract for sale are expected to close in the third quarter. Notably, the portfolio located in upstate New York comprises approximately 80% of the assets under contract, and the potential buyer has significant capital invested in due diligence. Currently, the buyer is working to finalize debt financing, which is progressing. Although it is taking longer than anticipated the expectation is that the sale should close in the third quarter. While these assets do not necessarily fit in DDR's investment strategy, we are confident that we would have alternative disposition options if this buyer is unable to close.

Asset sales under contract and closed year-to-date total $787 million at our share, which is in line with the high end of our original disposition guidance of $600 million to $800 million. These assets are fully occupied, institutional quality shopping centers that averaged 200,000 square feet and carry weighted average cap rate in the low to mid 7%s. However their low growth profile and locational qualities are not representative of the type of assets DDR wants to own long-term. While the management he will be conducting portfolio reviews over the next few weeks, we finally believe we are at the end of the major disposition process outside of purely opportunistic sales.

We are also under agreement to acquire two power centers located in the high barrier to entry market of Chicago and Portland for a combined value of $160 million. Both centers are expected to close in the third quarter, and will bring total annual acquisition volume to $229 million approaching our original acquisition guidance of $250 million, and fully funded with disposition proceeds.

The remaining $550 million of expected net transactional proceeds will provide enough liquidity to fund continued debt repayment and allow us to lower debt to EBITDA by 0.5 to 0.8 times to reach mid-six levels by year end. In the second quarter consolidated a debt to EBITDA followed by approximately 3.3 terms to 6.66 times, which is within 0.2 terms of our previously stated year end goal.

In addition to reaching a post recession low for a debt to EBITDA, and a post recession high for fixed charge coverage ratio this quarter, we are confident that our risk profile, and the quality of our EBITDA stream are well positioned for both full and fair markets going forward. With that said, while senior management and the Board will be discussing optimal balance sheet strategy in the near-term, we would fully expect that additional deleveraging past 6.5 times should occur. There continues to be no need to access to capital markets in 2016.

Following the close of the assets under contract we will have completed all necessary dispositions, and will return to a normalized level of opportunistic transactional activity. However, two headwinds to earnings remain despite their strategic merits. The first is the imminent wind down of our commingle joint venture, the DDR domestic retail fund. We have a 20% interest in the 55 assets held in the fund which was originated in 2007.

The 10-year mortgage debt encumbering the assets creates a natural expiration of the venture in 2017. We have articulated the market that we expect the culmination and sale of fund around year end, resulting in the loss of $10 million in fees going forward. It is worth noting we do have a rope around the portfolio that provides us the flexibility on whether or not we stay involved on all or a portion of these assets. We are conducting a strategic review of our options involving this venture. It includes of the wind down of the venture with no future participation, continuing equity ownership and or management of the assets, or purchasing a select group of high quality power centers that align with our investment pieces.

The second headwind is the long-term outlook of our joint venture with Blackstone. It is an overhang given the preferred equity component and portfolio quality, and DDR and our partner will look for an exit at a yet to be determined point to achieve their returns and cleanup our structure. The timing of asset sales, as well as any eventual liquidation is fully dictated by Blackstone. Our economic interest in the venture's assets are minimal at 5%, but the fund generates a significant amount of management fees, as well as interest income tied to $400 million of preferred equity.

I will now turn the call back to the operator for questions.

(Operator Instructions)

The first question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.

Thank you. Good morning. Sorry. Originally was good morning. Good afternoon Tom and team. Tom, just a question here, it's a two-parter but involves the same element. If you can one, you talked about stability and the need on the portfolio and investment side to create some stability with the various investments. So on one hand, originally, prior management had spoke about nearing the end of the cleanup, and you outlined what sounds like there may be a lot more cleanup to go. The second part is that the C-suite level, in the past seven years there's been three CEOs. So how do you bring stability to the C-suite? So one is on the investment side, stability, and the other one is from a leadership standpoint, stability.

Maybe I misspoke, but I intended to try to say that we are near the end, but we have just got to hurry up and get there. We are dragging this out a lot longer than we had hoped, and I think that though, everybody is looking for us to finalize last few sales to get over the hump. But I don't think it's more to do, I think it's just we want to do it quicker. In terms of the C-suite, I signed a -- I am signing a three-year deal. I am here. And I think we want to add people to the -- we added Vince. We're adding others to stabilize that, so I don't see any contradiction in the terms, we just need to get it going. And to be honest, on the fourth CEO and not the third.

The next question comes from Christy McElroy with Citi. Please go ahead.

Hi. Good afternoon, everyone. Tom, you've been doing a more in-depth review of the company and the strategy, what's driving that division? Is that it from your take on what you have seen since you became part of the management team in the last few weeks or is it that a deeper review is needed? Or is that more Board-driven as a result of any prior concerns? So, would this have happened regardless of David's termination?

Well, it happened because of [needs that] I'm unfamiliar. I joined the Board in May so I've attended one meeting, and I just felt before we did -- to me it's where are you, where you want to go, and how do you get there? And before we decide where we want to go or how we get there I've got to figure out where we are. So I wanted to do a quick and in-depth analysis as I could of, so that the whole company from the asset side to liability side and the organizational side -- so we can make more intelligent decisions on how to proceed both organizationally, and with our strategy on the assets.

The next question is from Michael Bilerman of Citigroup. Please go ahead.

Yes. I'm just curious. I know there was no severance charges related to David's termination, but were there any costs in the quarter or anticipated in the future quarters, just regarding the whole termination process? And, I wasn't sure if there was any sort of outstanding lawsuits from either David, if he ever filed for wrongful termination, or from potential third parties, whether they be internal or external, that may have been a reason or a part of the determination process.

There are no lawsuits that we know if. For sure, I mean nothing's been filed. We don't anticipate any. We don't anticipate reserving for anything and our cost to date, if we've incurred some, have been very minimal.

The next question is from Todd Thomas, KeyBanc Capital Markets. Please go ahead.

Hi. Thanks. Tom, you mentioned there being more of both development and redevelopment opportunities than the company may have realized previously. Is the development you're talking about expansion opportunities or existing centers or is this ground-up development and new sites with existing land? Just looking for some clarification; and then can you comment on how much more sizable you suspect the opportunity might be over time?

Well, number one, I will tell you that we're not talking about necessarily ground-up. The real focus was on the development within the portfolio. I'm going to let Paul comment on the side. But again, all I'm saying is just from the beginning of our review with some of these assets, there are more opportunities that we identified than we had previously thought. And since we haven't gone through the portfolio, it's difficult to quantify the excess over what our original estimates were.

Todd, yes this is Paul. One of the things we've got a great advantage with the time with Vince and Tom coming up with this portfolio review, which is an extensive review of every asset in the portfolio, which we'll be doing over the entire month of August. But really the way I look at, it is we've accomplished quite a bit. We've been somewhere around $600 million on about a six year program in redevelopment with yields that average somewhere north of 10%. This is a fresh look at the portfolio, because we do realize that redevelopment is one of the greatest ways we're going to grow this company, and it's a skill set we have. We will look at ground-up, but as we talked about many times on these calls, it's not a significant mover of the needle for us or anybody else in the industry. So, skill set we have, we will maintain it.

We'll look for opportunities, we're going to remain very disciplined and how we might go after the ground upside of it, if at all. But that is something as we get through the process of reviewing the portfolio and what our skills are, and where we're going to go, we will come up with a better determination. One of the things we have talked about very early on that we haven't really focused on since we started this redevelopment program years ago, was a value add opportunities.

Again, I feel very strongly that's a skill set we have here at DDR, we should take advantage of it. Tom alluded to that in his prepared remarks about creating value just versus just buying quality assets that [are deep]-- so we're going to look at it all. It's fresh eyes on it. Vince has some development experience in his background with Forrest City here in Cleveland and he seen it all from various retailers side; so it's a good healthy look at the entire portfolio and see where we can go with it.

The next question is from Vincent Chao with Deutsche Bank. Please go ahead.

Yes. Hi everyone, just curious in terms of the stability of the organization just if you'd comment on some of the morale of the group, given the suddenness of the change here, as well as any thoughts on potentially your reallocation of sort of the human capital, as you think about the organization.

Well, I'm obviously biased but I'd like to think that the morale is pretty good. I mean, clearly when you walk in on Monday morning and make an announcement that the CEO is no longer here, there was a bit of -- what the heck happened? And a bit of a shock. But my focus is not been on, and I've tried to be really diligent it is, I'm not looking back over my shoulder. I'm looking forward, and I'm trying to convince everybody else that there is still great opportunities here at DDR. We've got a lot of things going for us. We've been through a lot of organizational changes, I can't argue that. But if you look forward the opportunities look pretty bright and let's do that. And I think that, again from my perspective and I'm biased because I'm trying real hard to do this. I think the morale is good. And the capital -- I don't know we got a lot of good people. I just need to understand it we're going to finish that process up real quick. I don't expect a lot of reallocations, but I just want to make sure I understand what everybody's position is, what they do, their skill set, et cetera, et cetera. So I think we're well on our way to that.

The next question is from Haendel St. Juste with Mizuho Securities. Please go ahead.

Hi. Good afternoon. So, Tom, maybe you could expound or clarify a bit on the comments he made about some potential sale of Puerto Rico assets. It's been something that's been contemplated for a while at DDR but as I understand it, there's been less interest in the DDR's part in selling the best assets on the island, Plaza Del Sol, which I'm sure would garner interest. But that the ones you'd be more willing to sell, the bottom rung, there's not much of a bid there. So can you give me a sense of what you like to do, how maybe the Puerto Rico portfolio looks in a couple years if you get to execute, how you want? And then maybe some sense, current sense, of what cap rates on the island, for the better, and maybe the bottom tier assets.

Let me first suggest that I think I better discuss our strategy with the Board before I discuss it with you. As I said in my remarks, we are preparing a presentation for the Board. This is going to be a Board decision on the strategy. And you're right. We have talked about some of the low quality, high quality, no quality, all the quality. And I think it's, to be honest, more appropriate to review this with the Board and make sure I get their perspective before we comment on exactly what we want to do.

The next question is from Jeremy Metz with UBS. Please go ahead.

Hi, guys. I know you talked about a hold on hiring for the time being, but one of the holds following Luke's departure was sort of that CIO role. So I just wanted you give us your views there and if that's a spot you'll be looking to backfill down the road; and then maybe bigger picture, Tom, your thoughts on the currency in a load at the company.

Again, clearly that was an empty -- it's a spot that's been empty. Which again, it will be probably 30 days before we figure out our structure. And if that's a position we'll need, we'll look internally and then go externally -- I mean, clearly, I think what -- what is for sure, we want a senior person, whether here or outside, who can access deals, has good financial background, and can help us execute our strategy of growing the company. Once we get over this review, we'll see if we have that person internally. If we don't, will go outside. But we're going to make those decisions pretty quickly, but I think it would have been just been a little rash to go out and start hiring people before I understood who was here and what exactly our structure was.

The next question is from George Hoglund with Jefferies. Please go ahead.

Yes. I was wondering if you could comment a little bit more on sort of the delay in asset sales. I guess, one with the upstate portfolios, is that delay just purely just because of problems with getting financing? And then come also, are there any other sort of a broader delays on asset sales in the portfolio? And if so, kind of what's driving that?

Number one, I don't think there's any just a broader issues for the delay. This is a big portfolio. It's a lot of different assets. I think it's just taking time given the flexibility that the buyer wants to have with his financing to put the pieces all together. We know that they been spending money, they have probably in excess of $1 million, I'm guessing. I don't know the exact number. They're certainly following through in their due diligence. So I think it's just an overall look at they want good financing, they want flexibility, and they're taking their time in putting the pieces together.

The next question is from Floris van Dijkum, with Boenning. Please go ahead.

Great. Tom, I guess the question for you -- I guess you've started -- what has been the --

Floris, if you're trying to ask a question, I can't hear you.

Sorry. Can you hear me now?

Yes. Yes, we can.

I was going to ask you Tom, what has surprised you the most since you've been at the organization on the positive side, and also where do you think you've got, maybe the most work to do?

Well, I think on the positive side, to be honest, I was -- again we are not unique. I'm not trying to say we're unique. But the amount of change that has occurred in this company since 2010 has been enormous. Now, we also had a bigger hill to climb. But the amount of -- its just surprised me and it surprised me to be honest, how well the team and the organization has worked given, to be honest the dysfunction at the CEO level. And that has really surprised me. And I -- what -- I don't want to say what takes the most work, but I think we been so focused on sort of fixing things that we just got to turn our attention to how we're going to grow, because we just got a little more to go to get over the goal line, and then we're going to grow. And we just need to be able to shift and as they say in politics we need to be able to pivot, we need to pivot towards the growth strategy from sort of fixing the balance sheet.

The next question is from Richard Hill with Morgan Stanley. Please go ahead.

Hi. Good afternoon. Just a quick question. I know you're still thinking about how you are looking to position the company, but I'm just curious just from your vantage point, would it be something that you would it be looking at running a much a smaller portfolio of assets overall? I know in the past, DDR has highlighted that your top 100 assets contribute about 50% of your NOI. So how are you thinking about that, being in this seat. And I recognize you've only been in the seat for a couple of weeks.

Please, recognize that this comment comes from someone who has only been here two weeks too; but I don't think we're focused on size. We're focused on the bottom line for our shareholders, and if it means we grow, we grow. If it means we shrink, we shrink. I don't think, to be honest, I've given a lot of thought to the size as being a factor in how we want to position the company. It's really once we're focused on it, where can we create the most growth for the company and create the most accretive for our shareholders and the size has not been a factor or something we spent a lot of time thinking about yet. Maybe I will as we go forward but certainly not yet.

The next question is from Jeffrey Donnelly with Wells Fargo. Please go ahead.

Good afternoon. Tom, I recognize you need to be sensitive, but I'm curious what was it about the DDR culture that brought us to this point? And how significant it could administrative changes ultimately be to assure that the organization gets to a place where you think investor confidence is restored? And I guess if I could insert a follow-up, just over the past a few years under prior CEOs, DDR kind of flirted with various satellite office locations, New York, Chicago, for whatever reason, just given the opportunity you have now to sort of re-staff the C-suite, are you going to contemplate locations outside of Cleveland for the organization?

Well, we have a few already, number one. Let me answer the second part first. We have a few already. And secondly, as I said in my opening remarks we're pretty highly centralized. We are analyzing whether that's the best model for us, on the surface it seems to be because of our concentration with the top 20 or 30 tenants. But that's something that we are continuing to analyze. What got us to this point, I really don't care. I really couldn't care less what got us to this point. Here's where we are today, and we're keeping our eyes looking forward. I have no interest in looking backward. If it could be helpful, I would, but I'm not sure he will be helpful. So I'm just looking forward, and what happened in the past happened in the past. It's not my concern and I'm here to fix whatever is where we are from today going forward.

(Operator Instructions)

The next question comes from Chris Lucas with Capital One securities. Please go ahead.

Yes. A good afternoon, everyone. Welcome, Tom. I guess I wanted to touch on one of the topics that you mentioned which was filling an independent Board seat you vacated. I guess the current Board members have a great deal of private real estate expertise and tenure. I guess I was wondering what kind of characteristics or background are you looking to backfill that independent Board seat. And then maybe on a second part, just from your perspective, does your move to management negatively or positively impact your ability to make organizational changes from being an independent Board member in your view?

Let's see, number one, the Board qualification, you're right. We've got a lot of real estate expertise. I think there are other things -- first of all let me say -- this is the dominating and governance committee decision, not mine. I will certainly try to influence it the way I think we should do it, but it's their decision to make. And I think whether it's a retail, whether it's a financial expert, but certainly someone, I think we have plenty of real estate expertise, so someone with a different perspective that again, as I said in my opening remarks, will help the Board and help me and the team, run this company better. So a different than a real estate expertise, retail, financial, that comes to mind; but we'll see. In terms of the decisions, I think I have more influence but my position is that the Board is involved in the Board level decisions, then I'm running the company; and there's a lot of decisions that are my decisions to make, and I will certainly make them in consultation with the Board, because I value their input, but ultimately they're my decisions to make and that's the way we will make them.

The next question comes from Steve Sattler with Evercore ISI. Please go ahead.

Thanks. Good afternoon. Maybe this question is for Paul, since Tom, you are obviously very new and maybe don't have the history, but in terms of the redevelopments, and trying to, I guess want to speed those up, or you found more of them in going through the review. I guess I'm trying to understand maybe why those weren't brought to light in the past or what's -- I guess what's made you uncover them today versus say 6 months ago, 12 months ago, 18 months ago?

Steve, we haven't uncovered anything in the past two weeks, and we do have a pretty significant pipeline of pending deals which is probably in the $300 million to $400 million range. The thought we're trying to get across is we're going to take a fresh look at everything in this organization, starting with the portfolio, and that's going to bring to light different ways of going about it, and I mentioned the value add, which is something we've really not focused on since we started the program six or seven years ago. So it's not like we've uncovered anything in the last two weeks that's earth-shattering or a huge number. I'm very confident what we have in our pipeline and ability to deliver somewhere between $100 million to $150 million a year of redevelopment spend, and then bringing into service. So we're just going to take a fresh look at it, scrub it, look at how we can do things a little differently and see where we can create more value. So it's not something we've been sitting on, no lack of confidence in the folks that deliver, or execute on the program. It's really, let's just see how we can do it better and do it quicker.

And, Steve, just the focus is just, when you look in one direction you kind of miss a little bit in the other. It's not that it's been overlooked, it's just that this has been the primary focus, how do we buy high-quality assets in [infill] locations. I think we just need to open our eyes a little bit wider and have a broader perspective.

The next question is a follow-up from Michael Bilerman with Citi. Please go ahead.

Great. Thank you. Tom, you've expressed this sense of urgency, this complete review of the organization. You mentioned policies, procedures, cultures. I'm curious you didn't mention a review of corporate governance and the Board of Directors. And so outside of just adding an independent to the Board, you look at the Board as it's constructed now, eight members, five have been there for an average of almost 16 years, which would have covered all four prior administrations including yours, or four administrations. You have two from the Germans, which obviously own a lot of the stock and have that right to those seats and that you have yourself as CEO. Will you, as part of this review, look at the Board and make a recommendation if you decide that changes need to be made. And if not, if you're not going to do that, why? And secondarily, if your recommendation is status quo other than adding an independent, do you think that the company is at risk from a slate that's put up, that would want to see better effective management of the organization?

Well, let me answer the last part first. I hope that better management of the organization has been addressed the last two weeks. So that's number one. Secondly is, I understand the issue about longevity of the Board members. I think, unfortunately or fortunately, we're in a position now where we need to add. We can't rotate and I think that adding too many Board members at once is a risk as well, just the culture and the thinking of the organization. So A, it's not my ultimate decision. I can make a recommendation to the Board, and right now my recommendation is the Board, we need to add somebody and we need to add one or two people with a different perspective than as the previous -- one of the previous callers suggested of financial expertise and/or real estate expertise and bring in someone financial or retail expertise. So ultimately, I'm sure at some point there will be a rotation. Right now I'm more focused on the additions and bringing in a different perspective.

This concludes our Q&A session and the conference as a whole. Thank you for attending today's presentation. You may now disconnect.