Site Centers Corp (SITC) 2017 Q2 法說會逐字稿

(Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Brandon Day-Anderson, Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. On today's call, you will hear from President and CEO, David Lukes; Executive Vice President and Chief Operating Officer, Michael Makinen; and Executive Vice President, Chief Financial Officer and Treasurer, Matthew Ostrower. Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties, and actual all results may differ materially from those forward-looking statement. Additional information about such risks and uncertainties that could cause actual results to differ may be found in the press release issued today and the documents that we file with the SEC, including our Form 10-K for the year ended December 31, 2016.

In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, Operating FFO and same-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release issued today. This release and our quarterly financial supplement are available on our website at ddr.com. For those of you on the phone, who would like to follow along viewing today's presentation, please visit the events section of our Investor Relations page and sign into the earnings webcast.

At this time, it is my pleasure to introduce our President and Chief Executive Officer, David Lukes.

Thank you, Brandon. Good morning and thank you all for joining our Second Quarter 2017 Conference Call. I'd like to invite everyone listening to join the events and presentations section within the investors portion of our website to follow along with the slides we provided for this presentation. A copy of these slides will remain available on the presentation section of our website following completion of the call today. We've got quite a bit of content to review with you this morning. First, we'll provide an overview of our second quarter results, including a leasing outlook, and then will quickly move into a variety of topics related to our repositioning process. We'll review the major milestones we've hit so far, highlight some key changes to our balance sheet and guidance, and then review the conclusions of our in-depth portfolio review within eye toward providing some guidance around dispositioned volumes, the portfolio repositioning process and our ultimate asset mix.

Turning to the second quarter itself, Operating FFO of $0.30 per share was ahead of our budget, primarily because of lower-than-expected G&A expense, asset sales timing and better-than-expected same-store net operating income. The positive variance in NOI relative to our internal budget was a result primarily of timing related items, including earlier than expected rent commencement, several ancillary income items and a favorable core tenancy resolution. In addition to these nonrecurring items, results from Puerto Rico were above budget and bad debt expense was generally lower-than-expected. We highlighted in last quarter's call that we expected the second quarter to represent the weakest growth rate of 2017 because of the accumulative impact this quarter of vacancies from Sports Authority, HHGregg and Goldsmith bankruptcies. However, because of the timing of the fact as mentioned, we now expect the trough to occur in the second half of this year. Matt will comment in greater detail on this topic. But despite the change in 2017 same-store NOI cadence, we remain very comfortable with the original full-year same-store NOI guidance range. Additionally, without diminishing the importance of contraction and same-store NOI, Mike will review a variety of ways in which we believe we're seeing a return of operating momentum to the same-store portfolio, which represents over 90% of our share of the NOI. I'll now hand the call over to Mike to review our operating performance in greater depth.

Thank you, David. We will never be satisfied with the contraction in same-store net operating income, but behind the negative growth, there are variety of metrics that point to improve future NOI performance. First, the highlight of the quarter was leasing activity. Our volume of new leasing this quarter including pro rata share of joint ventures was 410,000 square feet at $16.29 per foot with new lease spreads at 10%. We also made substantial progress on a redevelopment pipeline this quarter with leases signed with Fresh Thyme Market and Sierra Trading Post, at our west side plaza redevelopment here in Cleveland. And we remain on track to open Puerto Rico's first Dave & Buster's at Plaza del Sol by year-end, which we expect to be a significant draw on the island. These strong overall result suggest that while we may have experienced an increase in tenant bankruptcies and store closures, demand for space in our portfolio remains high enough to produce strong re-leasing volumes. Diving into these metrics, you'll see that while new and re-leasing spreads were within historical norms, the CapEx associated with new leases has risen. This is the result of re-leasing of anchor spaces, especially those resulting from recent tenant bankruptcies. And while some quarters will be better than others it would be normal for leasing CapEx to be elevated and net effective rents to be somewhat lower as we recover from bankruptcy related anchor vacancies. Importantly, sharp economics remained attractive this quarter with CapEx and net effective rents in line with historical trends. As David mentioned, the decline in same-store NOI was largely result of store closures generated by significant tenant bankruptcies. The same phenomenon caused our quarter end leased rate to decline 60 basis points sequentially to 93.7, primarily as a result of HHGregg closures this quarter. We continue to expect the lease rate to trough in the third quarter. Our leasing pipeline remains robust, specifically, across the aggregate portfolio we have 280,000 square feet of anchor leases and 240,000 square feet of shop leases currently in negotiation. Suggesting we should be able to sustain the historically high levels of leasing activity reported in the first six months of the year. All of this momentum has translated into measurable progress and refilling vacancies created by Sports Authority, HHGregg and Golfsmith with 8 new leases and LOIs completed in the second quarter. In order to sustain this momentum, we have launched initiatives to re-double our focus on vacant shop space, which we believe represents a $40 million NOI opportunity in this portfolio. We are expanding our leasing team and spending significantly more management time in this area. Demand for all of this space may seem surprising in the current environment but it is not when considering our high exposure to tenants benefiting from the shift of the American consumer to discount oriented merchandise. This means that we're seeing deals not just with the usual suspects in this category T.J. Maxx, Ross and Burlington but newer and more quickly growing discount in Specialty Entrance like Aldi and Lidl, Total Wine, Fresh Thyme, Hobby Lobby and Ulta. We also executed 2 new leases with Dick's Sporting Goods in Evansville, Indiana and West Long Branch, New Jersey. With that, I'd like to hand the call back to David, who'll review some of our milestones to date.

Thanks, Mike. I'll now review with you some of our key achievements over the past five months. Our first month was focused on ensuring we had the right number of people in the right positions and the result was not just a significant cut to our G&A budget and reduction of overall staffing, but also the promotion of some of the strongest existing members of the DDR team. We remain highly focused on corporate cost especially those not specifically associated with headcount. We then turned our attentions squarely on the balance sheet. Last quarter, we highlighted the significant work we could do ahead of dispositions to reduce maturity risk and we have since made progress on this front. Specifically, the $450 million 10-year bond and $175 million perpetual preferred offerings that we executed in May and June resulted in a balance sheet, that is much better positioned for capital markets volatility. Mat will provide more color on this momentarily.

With our debt offerings completed, we continue to focus on the portfolio review process and executing on existing key transactions. I'd like to highlight our key accomplishments in this area. First, we closed on the restructuring of the DDRM or MANATEE joint venture. This transaction resulted in a variety of benefits including demonstrating strong pricing for our key DDR portfolio, accessing attractively priced CMBS capital for a large retail portfolio and demonstrating the sustainability of profitable and strategically valuable joint venture fees. We have also joined forces with Madison International, a highly sophisticated partner for the portfolio with whom we look forward to a long and productive relationship. Second, we closed over $200 million of dispositions in the quarter at a sub-8% cap rate, pushing net debt-to-EBITDA down to 6.5x from 7.0x and demonstrating that the markets for retail assets including power centers remains active. We closed an additional $115 million to dispositions since quarter end, as detailed in our supplemental, including a $90 million portfolio in our Blackstone joint venture, and they are in negotiations on additional assets. We remain optimistic about our ability to transact.

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and we sold through a combined $57 million at a low 8% cap rate. This transaction allows us to continue to manage our exposure to the island in the phase of domestic dispositions and demonstrate that there are avenues for reasonable transactions on the island. As I said on our first quarter call, we are not a distress seller and double-digit cap rates for the remaining even higher-quality portion of the portfolio is simply not realistic. We will continue to manage our Puerto Rico exposure in a thoughtful manner that protects our shareholders' value.

Finally and most importantly, we finalized our portfolio review. We now have not just a complete list of the assets we'd like to sell in the deleveraging process, but a list we believe is salable at attractive prices in today's environment. We expect to raise roughly $900 million of pro rata proceeds asset sales from April 2017 through mid-next year, including $200 million that closed in the second quarter. We expect the end result of this process will be a reduction in our debt levels to about 6x debt-to-EBITDA, on a pro rata basis. I'll return to our findings from this process in just a moment but first I'll hand the call over to Matt to review changes in the balance sheet as well as some thoughts around sources and uses over the next year.

Thanks, David. We've made some noteworthy progress on the balance sheet in the last several months but have plans for further improvement. I'll touch on those in order. In terms of what we have gotten done, the financings we completed in May and June accomplished several goals. First, our 10-year bond in preferred activity transactions demonstrate DDR's access to capital at attractive prices. Second, and perhaps more important, it served to de-risk the balance sheet. We moved from a position of having too much debt maturing in the near term to being able to absorb 3-year of maturities without needing further access to the capital markets even in the absence of additional asset sales. Finally, we increased our average debt and preferred duration from being one of the shortest in the sector to one of the longest at nearly 8 years, including preferreds.

Looking forward, completion of our planned dispositions will position us to have one of the best balance sheet in the shopping center REIT space. Debt-to-EBITDA on a look through basis would end up just below 6x, a more modest level on year or two ago and in line with the peers. But we would have other differentiating changes as well, including virtually no consolidated secured debt, among the lowest level of bank debt exposure and average debt duration among the highest in the peer group and no significant maturities for over three years.

The planned repayment of 2017 and 2018 mortgage debt should unencumber over $550 million of gross book value and eliminate mortgages with a 19% average debt yield. We've got a lot of wood to chop on the dispositions front but if we succeed our balance sheet will be very well positioned to allow the company to take advantage of investment opportunities.

I'd like to now turn from the balance sheet to 2017 guidance, which we are leaving unchanged despite stronger-than-expected second quarter results. On same-store NOI, we are leaving guidance unchanged largely because of a range of offsetting factors. First, our NOI out-performance in the second quarter was attributable primarily to several timing related factors including: one, earlier-than-expected rent commencements; two, favorable ancillary income results; and three, a favorable onetime co-tenancy resolution. They were also some more sustainable sources of the positive variance, including generally better-than-expected results from Puerto Rico and lower-than-expected bad debt expense. Offsetting the generally positive impact of second quarter numbers are several smaller tenant bankruptcies that occurred following our last conference call in April, including Gordmans, West S and Gander Mountain. A third factor that will likely impact annual same-store NOI performance is our ongoing dispositions process. We have several assets on the market that we recently finished releasing and therefore have higher 2017 NOI growth rates. While the decision to sell these properties is the right long-term decision for DDR, the exclusion of these assets from the same-store pool, when they are disposed, could negatively impact our reported annual same-store NOI growth. Summing up, we remain extremely comfortable with our guidance range but we also expect our growth rate to trough in the second half of the year rather than in the second quarter previously.

I'd like to also point out 3 modeling items. At quarter end, we had $414 million of cash on the balance sheet and $61 million of restricted cash, $310 million of this cash was used to retire the April 2018 bonds in the 2nd week of July and we will retire all of our remaining 2017 maturities, $126 million of mortgage debt with the balance of the cash the 1st week of August. Additionally, as part of the April 2018 Bond redemption we paid make whole charge of $7 million, which we will recognize in the third quarter. Lastly, included in the quarter was $1 million of base rent from bankrupt tenants that we will not receive in the third quarter.

Finally, before handing the call to David to discuss the completion of our portfolio review process, I'd like to touch briefly on sources and uses for the next 4 quarters. We expect to achieve our target 6x debt-to-EBITDA goal by raising $900 million of pro rata proceeds from dispositions, including $200 million that closed in the second quarter. We intend to use proceeds from the sales to repay mortgage debt maturing in the next 2 years, the $200 million secured term loan outstanding, $200 million of the $400 million unsecured term loan, $82 million of unsecured bonds maturing in 2018 and a $100 million of additional mortgage debt. While there will be a cost to shareholders from this activity the benefit is a much better balance sheet positioning DDR for future growth. This analysis does not factor in proceeds from the redemption of any Blackstone preferred. We view disposition proceeds and Blackstone preferred proceeds as interchangeable. Should combine proceeds exceed our deleveraging goals, we would expect to reinvest the excess capital.

I'd like to now hand the call over to David for a summary of findings from the portfolio review process.

Thank you, Matt. I'll take a few minutes to describe the results of our portfolio review process, which we began discussing last quarter as well as what this means for our dispositions and capital allocation decision-making, going forward. As I said to you last quarter, we view which property like most investors view any investment they are making, which means understanding the cash flow growth profile and the risk associated with achieving that growth. We're highly reliant on factors like location, site and rent roll and we are much less focused on a property's MSA, the average base rent per square foot or its specific retail format. These considerations can be broken down into specific qualitative and quantitative factors. On the quantitative side, we focus on the consumer within the asset's specific trade area to measure 4 factors: number 1, spending power; number 2, the GAAP between the center's in place rent and market rent; number 3, the number of trips the consumers make to the center to measure its ability to attract convenience type tenants; and number 4, the density of the asset or the FAR to measure site efficiency. On the qualitative side, we gauge the attractiveness of the intersection on which the asset is located. The asset's visibility, the layout of the center and of course, the property's merchandise mix, which is an enormous factor in determining the asset's consumer drawing power. Assets that screen well on these qualitative and quantitative aspects, are those that are candidates from being part of the DDR portfolio over the long-term.

With the assessments now complete, we can much better understand how the portfolio fits into the 3 buckets, we discussed in the first quarter call. Durable, growth and redevelopment. We believe roughly 66% of our NOI falls into the durable category, which we see as assets with stable cash flows but more modest upside. These assets include our portfolio of ground leases and single tenant assets, a wide range of more convenience oriented properties and perhaps the largest group those assets that represent dominant locations and that offer very low occupancy cost ratios to their tenants. Our dispositions fall almost entirely into this durable category. With a very few exceptions, we're selling them not because we believe they're risky but because of our deleveraging goal. We will, however, use the deleveraging process to sell lower growth rate assets and improve the impact of the higher growth assets we intend to keep. Roughly a quarter of the NOI fits into the growth category, these are properties that we believe have some financial upside because they're currently under serving their three-mile trade areas, that have an opportunity for profitable re-tenanting with high productivity merchants and those with recent box vacancies that we believe can be filled at an attractive mark-to-market rent.

And finally, we believe about 10% of the portfolio falls into the third redevelopment bucket that we described last quarter. These assets should have the highest growth rates because they present significant densification opportunities, significantly below market rents or an opportunity to optimize their overall formats. Just to make it a bit clearer, how we're screening and making these decision on assets, I'll review an example in each category. When we state that 66% of our NOI falls into the durable category, it's fair for investors to ask exactly what gives the confidence in the security of these cash flows in a challenging retail atmosphere, especially in non-gateway markets. Polaris Towne Center in Columbus, Ohio is a great case study. The aerial photographs shows that the center has high visibility, a long and simple layout and a convenient shallow parking field with multiple access points. The tenant roaster includes a Kroger grocery store on one end, Lowe's and Target on the other and a strong collection of junior anchors and shops in between, with well-located pad buildings along the main access road. Convenience, cross shopping and visibility are the key ingredients for strong tenant sales. This is a great qualitative setup for the quantitative analysis, which is primarily about rents and sales numbers and how they support the stability of the landlord's economics. So here are the numbers: Kroger has a low single-digit rent and an occupancy cost ratio of just 1.7%, but their low-rent also flat for the next 21 years. Durable, low anchor rents means economics must come from elsewhere and in this case it's the junior anchors and shops. Like several other junior anchors here, TJX has a very high sales and a low 3.5% occupancy cost ratio. This sets us up for some strong shop rents, which were indeed 130% higher than the junior anchors. But this higher rent is also a product of shop scarcity. Only 20% of the center space is non-anchored. This all means strong but limited shop economics. A near term OfficeMax expiration with a large mark-to-market rent opportunity even provides upside within the junior anchor category. And finally, over $700,000 of NOI is coming from ground leases on single tenant (inaudible), which carry an inherently low cap rate and tend to be stable below growth. Summing this up, at 99% occupied, Polaris is a very high quality but also loan growth property.

Growth assets have similar qualitative factors but more financial upside. Consider Tanasbourne Town Center in Portland, Oregon. Again exceptional location and visibility along with easy access and convenient side circulation. A strong anchor base of Nordstrom Rack, Target, Ulta cosmetics and Ross generate strong consumer demand and traffic. You are going to note a scarcity theme with shops in our DDR presentations and this site is no different with only 20% of the GLA allocated to shops, the shop rents are 180% higher than the anchors. This property fits into our growth portfolio because we've recently executed leases to D-BOX and back-fill a vacant Haggen so the NOI growth here will be above average over the next year or two as occupancy rises back to 99% and new rents commence mid-next year. This case study also demonstrates the DDR's high leasing volumes have been associated with good inventory and great properties made available through tenant bankruptcies.

Speaking of the best real estate, about 10% of our NOI comes from properties that we see as yielding land plays with greater densities in their future. A sneak preview of one such asset is Sandy Plains Village, just outside of Atlanta, Georgia in Roswell. The property's ugly appearance and anchor vacancy make it easy to overlook but surrounding demographics are strong and the site is one of the few open-air and low-density properties in an otherwise wealthy residential community. We have a strong movie theater with low occupancy cost, many of our shops roll lease terms with no options in the next few years and the anchor vacancy is actually a dark, and paying Walmart that controls over 30% of the land. These are all great ingredients for redevelopment potential. Our executive team spent a day on the site a few weeks ago with our Atlanta office and we're all excited about the possibilities. Before we take questions, I want to briefly discuss our dispositions program. Previous management at DDR did an excellent job disposing of risky assets and you can see we made further progress this quarter pairing back the portfolio. We're working hard on leasing, we are making progress on asset sales, our capital allocation is firmly geared towards deleveraging and the portfolio review process has given us more clarity on our future growth.

And with that, I'll turn the call over the operator for questions.

(Operator Instructions)

The first question comes from Todd Thomas of KeyBanc Capital Markets.

First question. In terms of the operating environment, can you comment on whether there's been a change in your conversations with retailers since earlier in the year around closures and concessions? And then can you just comment on the deceleration in trailing 12 month leasing spread has taken place there over the last few quarters? Is there any visibility around the stabilization there? Should we anticipate a further deceleration on leasing spreads?

This is Mike. I'm going to break that answer into 2 phases. The first is comments related to kind of the tone of the tenants we've been talking to. And I will say that while there is definitely a negative side of the tenant commentary, the tenants with whom we're doing deals, has actually been quite aggressive and quite enthusiastic and aggregately across the board, we're not really seeing any slowdown in the rates or the momentum of leasing. As far as leasing spreads, I still think that tends to be little bit bumpy and occasionally you are going to have some quarters with lower spreads, some quarters with higher spreads but I really don't see a longer-term trend shaking out that I would anticipate to carry forward on leasing spreads.

Okay, and then Mike, the $40 million base rent opportunity that you mentioned from leasing vacant shop space. Where does that take the lease rate for that segment of the portfolio? I guess less than 10,000 feet, and sort of what's a reasonable timeframe to get that lease straight up and recognize the value there? And then also, what was preventing the company from leasing that space previously?

Well, I think -- I'll answer that in 2 pieces as well. First of all, with regard to past history, I think the company has always been quite good at leasing shop space but I also think that it has been treated a little bit more as a secondary growth vehicle relative to anchor spaces. And I think that's really where the fundamental change is going to be taking place, and that the shop space is going to be treated with just as much aggressiveness and just as much focus and reward as the anchor space. As far as where I think the spreads will go, I think there's great roster of shop tenants out there, national franchise tenants and national tenants, who I think will actually help our leasing spreads.

Todd, just to be a little bit more specific. I mean, we're not going to give out guidance on exactly where we're going to capture that, we're starting process, we're very focused on it, we'll give you more clarity when we have it but I think the main message here is we smell some opportunity, it's hard to know exactly how much of that we'll get and when at this point.

Okay, and then just lastly, so the lease rate for the portfolio is expected to come in -- from the 93.7% at June 30. Do you have any sense -- I'm just trying to understand whether that bottoms in the third quarter and begins trending higher into year-end with the view in the '18? Or do you think that we continue to see the portfolio's lease rate trend lower from 3Q into 4Q?

Yes. I would say, based on what we can see today, it's troughing next quarter so in the third quarter. I would say that from there, we -- holding things exactly where they are today, we definitely see the ability to start making back ground, particularly into 2018 as we've talked about before. I guess the big wild card there obviously is for the tenant bankruptcies, which you and I have probably about the same amount of visibility on.

The next question comes from Christine McElroy of Citigroup.

I guess of the -- just in the context of the portfolio review and asset sale planned of the $900 million that we should expect over the year, including Q2, we obviously know the break out of the first $200 million. But of the remaining, given that you have completed the review, can you talk about how much of that you'll expect will be in Puerto Rico versus the U.S.? And how much of that could potentially be your share of sales in Blackstone JV?

With respect to the dispositions, I think you have to look at it from our perspective and recognize that we've taken every property in the country and Puerto Rico, and then putting it through a bottoms-up analysis, simply to put into one of those three buckets. So Puerto Rico, I don't see it any different than the remainder of the country where we've got properties in three buckets, the ones that tend to be the lowest growth, the ones that we think we have kind of achieved maximum NAV and the ones that are transactable are the ones that make the most sense to sell. So I don't think we have a breakout for you to how much by property type or by location is within that number, I think you can rest assure, it's going to tend to be the low growth assets that we're looking to dispose of.

Okay, I guess I'm just trying to get a sense for what -- how you are viewing Puerto Rico exposure, and kind of, where you expect to be in terms of ownership at mid-2018. It seems like the 2 assets you sold were not among your top assets on the island. And given that you sold them at a low rate, wondering what that sort of implies for the value of your remaining assets and your view of that? And the potential demand environment for additional transactions there?

Right. Well, let's look at a couple of interesting facts about the two properties we sold. The one of them is about an hour and half from our office. These 2 properties are effectively the only ones of any great size that don't have a Walmart or a grocery store. When we look at the properties in Puerto Rico, we see a lot of extremely high volume tenant sales, particularly coming from Walmart. We still see a lot of consumer traffic, we see plenty of sales volume that's driving some decent profits for the tenants and I think we also have the best operating staff on the island. I mean, if you spend time with our portfolio folks there, you pretty quickly come away very impressed. And so as an operator, I think it's our job to make sure that we are extracting every bit of NOIs we can out of that property. But in the context, we have to manage our relative exposure as a company, especially in light of selling down assets in the U.S. our relative exposure goes up, so that's not, that's not lost on us. The reality is that I do think there is a market for reasonable transactions in Puerto Rico. I think we're open to continuing some of those transactions. But without any specific information, we're going to continue to operate these properties with the same vigor that we do in the U.S.

So Christy, we're just -- we're not going to give specific Puerto Rico guidance, given how thin the market is, et cetera. I think our message remains the same there, which is we tell you about once we've done stuff, with the overline theme that we understand we need to manage exposure.

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

I was just -- in looking at the same-store metrics on the supplemental. I noticed that the base rent was up 0.4% on a DDR share basis but recoveries was down 1%. I was wondering why the recoveries would be down?

I don't know the exactly answer for your question, Craig. I would say that there is some noise in the numbers this quarter based on some settlements that we had, et cetera so that kind of the recovery ratio is not kind of a perfect number to look at going forward. So I think there's a little bit noise, I can get back to you on some of the exact sources there.

Okay, and then do you see the activity in the limited small shops that I guess the portfolio has improving by the trend of the -- end of the year?

I'm sorry, Craig. You say improving by?

Just the rate of lease spreads and occupancy in the small shops?

We're undertaking an initiative right now, and I'm hopeful, we'll start to see some results in that by the end of the year but it will be a longer process than that.

And Craig, just to circle back to your previous question, you want to...

Sir, this is Christa Vesy. Craig, just to you know, the recoveries are really tied to what the spending is at the properties, so that has a seasonality pattern to it. So you are going to see a little bit more noise tied to spending, I wouldn't say any sort of negative trend in any way, just more timing related.

The next question comes from Steve Sakwa with Evercore ISI.

I guess as it relates to Puerto Rico sales, I realized it's not an overly deep market but could you maybe just describe kind of the process? And maybe the number of bidders that ultimately took a look at some of these assets?

I think that the fact we transacted with the private buyer and I would call a successful process, is probably good enough right now, Steve. I think that the market is pretty small, I think a lot of people know each other and we've built a lot of good relationships over time at this company. A number of folks that have worked here for long time, have some great relationships on the island and we're continuing to talk anybody that has an interest in some dialogue.

Okay, I guess it relates to the $700 million of future sales. I realize you're not being too specific on timing but can you tell us if you have got any of those assets currently being marketed?

Well, I think we have given time in -- on the $700 million that we have a target for mid-next year and I think we're feeling pretty good about our momentum, but we haven't said as what percentage of that is in what location and I think we'd rather just remain silent until we transact.

But we're in negotiations on properties today, Steve, with right level of progress there whether it's purchase and sale agreements or otherwise, we definitely -- there is a pipeline it's ongoing, it's not like it kicks off as of today.

No. I guess my question was, is all $700 million of that currently being marketed and that would close over the next, call it 9 to 12 months, is that?

I wouldn't say the entire $700 million is currently in the market. As you know, this is kind of a -- it's a process, right. So it depends on exactly how you define that we definitely assess the sale ability of all of it using brokers, et cetera. So it -- we definitely made progress on the whole thing. How far we get and exactly when is -- we're not not saying it because we're hiding something, as you know, this transaction is very difficult to predict.

Right, and I guess...

Some -- Steve, some of this is making sure that -- when you market a property for sale, you need to have gone through the proper preparation. I mean, for instance, if a large anchor tenant has an option exercise that's December 1, we're either going to try and negotiate an early renewal or we're going to wait till the option is exercised and there's a five year term left because the CMBS debt is going to require that from the buyer, so some of the sales process is kind of paced out over the next 6 months before we market properties.

Okay, and then just lastly, in terms of sort of CapEx that you guys talked about and highlighted the higher CapEx on the new deals, I think renewals are maybe not up as much. But when you just sort of think about big picture, kind of maintenance CapEx, TI and leasing commission as a percentage of NOI. Is there sort of a ballpark number that you think is a reasonable run rate on a go forward basis for the portfolio?

I think that's a -- I think it's a really tough question. It's obviously -- it's one of the $60,000 question I think. I would tell you that we do feel comfortable with that, we do these anchor deal it's going to higher, right. Kind of where it is today, you go a little higher or littler lower but it's going to be at these more elevated levels. The real question that is, what does the bankruptcy picture look like, right. If we continue to see this very high level of bankruptcies obviously, that long-term run rate is going to be quite a bit higher. If things taper off here and we've kind of gone through a cycle and we get through the -- that we've gotten through the difficult part of it, then obviously, you're going to be down at the lower level. You can see, I mean over the course of the company's history, you've seen this number cycle before, right. So I would say at least in our experience that CapEx is rather cyclical and trying to choose a long term number kind of depends on where you are in that cycle.

The next question comes from Alexander Goldfarb of Sandler O'Neill.

Two questions. First, just wrapping up on Puerto Rico. I think you guys said that the sales were somewhere in the 8 cap range. And based on your comments that doesn't seem like your that -- your -- it seems like you're more -- I guess easy is to say that the headlines of this fear in Puerto Rico, and the NOI impact there, seems to be lesser concern for you guys versus maximizing price, in other words, you are fine keeping the assets and it almost sounds like the pain and the rental roll down that the island has experienced may be flattening out such that you fine keeping those assets. Is that a fair assessment?

The certainly, from a price perspective. I mean, I think if you tour properties for a living and you go to Puerto Rico and you look at the rent rolls and you watch the tenant demand and you see where the properties are located and you look at relative impact of Internet sales. You feel very positive about the fundamentals of what we own on that island. And so I think, from a shareholder perspective, shareholders should expect that we're treating their currency with a lot of respect. And I think these properties deserve to be priced accordingly not in a fire sale manner and I do believe that long-term, and even as recently as last month, there are buyers that also find value in a NOI. So I think you're right, and we do feel a little more positive and a little more protective of the value we have in that island. The flip side of what you're saying, I'm probably a little bit more sober on and that is, that the rent roll downs, the immediate short-term operating fundamentals in Puerto Rico are very difficult. The number of tenants that are seeking to back-fill certain sizes of spaces, is more limited than it was before. Part of that is because we might be in a little period of time here where foreign U.S. retailers are simply not expending on the island, now that might change. But I don't think it's a long-term damage, I think it's more of a couple of years where we're looking at individuals leases burning off. And it's going to be a little bit of a bumpy ride, we've got a couple of leases coming online in the next year, that are huge positive impacts in Puerto Rico, Dave & Buster's is one of them. We also have a couple of Office Depots that mature over the next year that have big roll downs and so it's a little bumpy of a ride, but we have had enough time to focus on the cash flows and really believe that we understand the long-term value of the NOI.

We are looking at on asset by asset basis Andrew right, and so it's not about an emergency, sell the entire thing tomorrow, in order to solve an IR issue. It's about understanding each asset, some assets look great, some assets less, so it's going to be a much more of granular exercise but we're going to manage our exposure there.

Okay, and the second question David is, you mentioned some cost saved outside of corporate G&A, et cetera. So are there cost saves in the field whether it's regional offices? Or may be more use of third-party brokers or things like that? Could you just discuss some of those other cost saves beyond the corporate overhead?

Yes. I think specifically, I was mentioning non-headcount G&A, recurring G&A that runs through on a corporate level. And whenever you have a company that has sold as many assets as we have over the past couple years. There are opportunities to look at how we use office space, where people sit, how they work together, our IT department, our outsourcing of certain functions. With the G&A budget the size of ours, we feel confident that we can find some cost savings, if we simply focus on it, some of that is in the field, but I would say quite a bit is at the corporate level as well.

Is there a number that you would identify?

No.

No.

The next question come from Vincent Chao of Deutsche Bank.

David, maybe a question that going back to the different -- the 3 different buckets that you outlined. Yes, obviously, durable being the lowest growth I guess, can you comment on sort of the relative difference in growth do you expect between these 3 buckets and what the right mix is longer term? And then as far as the longer-term growth algorithm, is it really just a matter of recycling those durable? And once you get the growth assets stabilized and the redevelopment stabilized, they become durable and you just keep rotating over time?

Yes. I think the later part of your question is the correct way for you to think about how we're thinking about our portfolios. If we have long-term flat ground leases that are growing at half a point, is probably viewed more as a source of capital for us in the long-term than it is growth for the company. Our job is to make money in retail real estate and we fully intend to be putting a lot of hard labor into redevelopment and in a repositioning particularly, leasing which happens to be the easiest way to make money in real estate. And we're going to be using lower growth assets over time as a source of capital. So I think, that's probably right way to look at it. Putting specific ranges of CAGR is a little more difficult, simply because the top of the bucket, the redevelopment side is going to have a pretty outsize growth pattern but also a lot of capital involved, that the middle section I think will have a very outsize performance but it's for a period of time because some of that is because of recent box vacancies, where we have some lease potential. So I think it's a little bit -- I would feel uneasy putting specific targets in each one of those categories.

Okay, I guess, may be a different way, I mean, just from a mix perspective, I mean, once you're done with the dispositions, which are largely in the durable bucket, is that likely a sustainable mix going forward? Or does that just depend on the times of the cycle?

I would just say we have a cost of capital, right. We have a return requirement that we need hit over time for shareholders, right. And that will -- so the mix that we have to some degree will be dependent on what we think the growth rates of those assets are going to be, given where we are in the cycle, right. And our ability to hit our cost of capital. So we can more aggressively or less aggressively recycle that capital to try to achieve better returns for shareholders depending on what the existing assets are going to be able to do. We're sitting at a point of cycle right now where there's a fair amount of uncertainty, where there's fair amount of vacancy, et cetera. So I think, it's going to an evolution here, it's hard for us to know exactly what it's going to look like then.

Got it, got it. Okay, and then maybe one last question, just on the same store NOI growth dropping in 2H. I know we talked about this a little bit earlier, it sounds like the current expectation is 3Q trough in lease rate beyond unknown bankruptcies and leaving some wiggle room for that, is there anything else that would cause the same-store NOI to trough in the fourth quarter versus the third?

Yes, I mean, look there is -- I think there is a temptation to engage in some false precision here, right. Things move, exact our rent commencement dates, seen 2 or 3 anchors change rent commencement dates to a couple of different months. That can change where exactly you trough, right. We do have -- we're going to have a couple of incremental vacancies that we know about that have -- we've known about for a while, they are going to happen, one in the third quarter, one in the fourth quarter. So I think, my level of conviction is exactly the third quarter is not terribly high. But I think you should look at that we said the second half deliberately, because I think it's not totally clear which one it's going to be. I would expect some negativity, some negative growth probably in both quarters.

The next question comes from Caitlin Burrows of Goldman Sachs.

I was just wondering if we could talk about Ascena, obviously there're a decent tenant of yours and while it kind of across all of the retail region they've recently announced they were going to -- go through some either start closures or rent roll downs over the next 2 years. So just wondering what exposure you had to those leases expiring by mid-2019? And if you've started those discussions with them?

We have certainly started discussions with them. We have about 100 stores throughout the various brands and right now, it's in the very early stages and it's pretty difficult to determine exactly how things will shake out but we are all over it from the stand point of both discussing with them as well as focusing on any backdoor opportunities for situations we think may end up needing to be replaced.

And I guess as they have kind of said that they -- would either close the store at the end of the lease or look for roll down. Do you have any idea of how kind of, I guess willing you are to accept the rent roll down versus the path to go out and resell?

Every single location is dependent on the supply and demand of that market, the demand for the space, every single situation is treated independently on store by store. So I don't really have the ability to give aggregate answer for that.

And just as a point of clarification, it's 1.3% of our ABR on a pro rata basis.

Got it. Okay, and then, I know this might have like kind of been asked already. But just in terms of same-store NOI this year, obviously the guidance range is sort of down at the midpoint and that will be the first time since 2009. And you guys even mentioned that the previous management team did do a pretty good job at printing the portfolio. So just wondering just going forward when you think about long-term potential growth of the company, do you see it getting to positive territory? And at what point might we be able to see even maybe like a 2% to 3% positive growth?

Yes. I think speculating on the long-term will be difficult. I would just remind you that as a management team that's been in the industry for long time. I think we've seen a number of cycles and have kind of general feeling as to how much water is in the tub as the economy kind of ebbs and flows and certain types of properties are a little bit more stable than slower growing. Properties that have a high percentage of power center tenants, junior anchor boxes, tend to be very, very stable unless there is a period of time where this tenant has been bankrupt and we are in those periods of time. So I don't think this is a surprise to us, I think we came here fully knowing that what point in the retailer cycle we're in. But we all believe that DDR owns a pretty amazing portfolio of inexpensive space in the last mile situation and convenience is winning. So we're losing tenants but the leasing team are bringing new tenants and to fill them up. So I would personally see it as kind a short-term issue where you're cycling through existing bankruptcies, it cost the companies some CapEx, it costs us a lot of work on the leasing side, but we're left with new tenants and properties that are sitting in great trade areas. The only thing that would change that is if that the cycle of bankruptcies continues such that you never really get back to a stabilization. But at this point, with the quality level of the real estate we have, I don't see it as a big risk.

The next question comes from Jeff Donnelly of Wells Fargo

Maybe I'll start with you, Matt. Just thinking about leverage target of about 6x net debt-to-EBITDA, I'm just curious why you determined that level versus say something more in the mid-fives that would put more squarely in the middle of the range for triple P?

Yes. I mean look, I think that we will adopt the stance that if we can continue to delever without causing enormous pain to shareholders, we'll do that, right. But I think -- and they call this an exact science, I think it's difficult. I think we're looking at 2 different things, right. One is, the willing -- our willingness to inflict pain on the equity holders, right, and how much, because the delevering cost them, so there is a limit to how much we want to inflict. There is also a limit to how long we want to do this, right. So we continue to dilute and dilute and dilute, year after year after year. So we viewed ourselves as having to some degree a time limit on this, right. And so what you can get done on that time and then also becomes a bit of natural outcome and that kind of helps you drive towards where we ended up. The final thing I will say is and I, as much as anybody, I believe that debt-to-EBITDA is a very important number but I think people should be equally focused on the structure of the balance sheet, right. And in particular, what people's maturity profile looks like. 6x debt-to-EBITDA with nothing rolling in 3 or 4 years debt wise, is a very different than 6x debt-to-EBITDA with everything rolling in 3 years, right. And so what I feel very good about is while we could all agree, hey we would like to delever 5x or 4x sure, our willingness to inflict that pan is limited, and frankly if we can get the effective leverage down by having a very long runway of very low maturities, that's almost getting to the same place.

And just now of the review in plan are complete and you may be former sense of the major factors that are affecting your future outlook. Do you guys expect to return to providing FFO per share guidance? And maybe using move in the back half of '17?

On the margin, I think so Jeff. We haven't' made a final decision about that.

Yes. And just one for David. Can you talk more specifically about pricing that you're seeing in the market? Maybe how you see A versus B assets in A versus B markets? And where you feel that remaining $700 million of asset sales falls in that grid?

Well, starting with the later, it's a little difficult. And I know that it sound evasive but it is a little difficult because the property typology that we're putting on the market is not consistent. In other words, we're a little agnostic as to the retail format, when we put properties into these 3 buckets. What we're looking for is growth and we believe that we can roll up our sleeves and create NAV. And so just by default it means that bucket has a lot of different properties. We're going to be selling some single tenant net leased assets, we're going to be selling some grocery anchor properties, we're going to be selling some power centers and it's now a lot different, than what we've sold in the last quarter, which was a mixture of those 3. So I think, on a cap rate basis it's hard to tell you on a quarter by quarter basis what the whole bucket is going to look like. Personally, I think that our acquisitions team and the amount of insight we have into the market is a little bit surprising and then it's pretty strong that the CMBS world is still pretty supportive, I think at reasonable levels, I think they are looking through to the cash flows and seeing properties that are somewhat secure and the number of bidders on everything to date that we have really put into the market has been enough that makes us feel confident, we can keep going.

And maybe asking as you really -- I mean how do you think about the spread between sort of A asset, A markets versus, I guess call it B assets and B markets. I think there's been concern that some of the weakness that we've seen in the mall business for example, on asset pricing is spilling over into the power center business. I'm just curious, if you think that, there's truth to that or if you think that's maybe a little bit overblown? I mean, maybe you can talk a little bit about some of the pricing you've observed?

Well, we haven't seen it. Surely there's been a lot of dialogue, but there's a lot of dialogue in the last couple of months on everything retail. But in terms of the pricing and the willingness of the buyers and lenders, we've still seen enough resilience that with the pricing I don't think it's really moved a whole lot.

The next question comes from Richard Hill of Morgan Stanley.

Thanks for the clarity about the trough and same-store NOI in 2H. I -- and I apologize if you already went into detail on this. But I was hoping you could give some discussion around your domestic portfolio versus your Puerto Rican portfolio? And maybe what's driving that deceleration? And then how should we think about your JV portfolio, which seem to decelerate the most across your Puerto Rican and then your domestic portfolio?

I guess the only incremental color, I would give -- we have got -- I mean it's really hard to, again, this whole business of precision over 6-month time period it's difficult, right. I want to be as transparent as we can be, but it's hard to pin down the exact numbers because things do move around. As one example, we've got a Sears that's going to go bankrupt in the domestic portfolio in the third quarter -- not bankrupt sorry, it's going to close in the third quarter. And then in the fourth quarter, we've got a Walmart in Puerto Rico, that's going to go dark, right. So based on that and some -- just trying to kind of read the tea leaves a little bit different given all the numbers we have, I would say the U.S. probably is a little more troughing third quarter if I had to guess and Puerto Rico troughing more than fourth quarter growth rate wise, but it's again, there's some false precision there, unfortunately.

Yes. So no specific trends to say, look, one is decelerating more than other?

No. I don't think so.

Okay, that's simple. All right. So you mentioned some comments about CMBS market and I think maybe you financed something recently. Did you see any sort of difference in demand based upon differences in the quality of the portfolio that you were capitalized?

Richard, it's Conor. Yes, I think that the difference in demand was more a function of fixed risk floating end term, as opposed to the quality of the portfolio that we saw, the biggest variable we saw.

The next question comes from Michael Mueller of JP Morgan.

I just have quick numbers question. I guess in talking about the second quarter results, you mentioned there are some nonrecurring items in there. I think also Matt, you mentioned debt of $1 million of base rent that's nonrecurring, you talked about something (inaudible) resolution. So If we're just thinking about the Q2 NOI starting point. How much do we need to strip out on a go forward basis to capture all of that?

Well, what we said was there is $1 million of now bankrupt tenants that we got, so we got some million dollars of base rents from bankrupt tenants in the second quarter that's going to disappear in the third quarter. There are some puts and takes Mike, going forward, and it's unfortunately, it's kind of laundry list of small items, so I think it's really hard to summarize that. I would say take that $1 million and you can add a bit to it, I don't think it's a massive amount that you've got to add it, so I don't have kind of buckets for you.

No. That's fine, so it's...

Mike, (inaudible)

So it sounds like it's not material anymore.

(inaudible) we'll break that out in supplemental, you'll see it revert back to historical levels, starting the next third quarter.

The next question comes from Anthony How of SunTrust.

It's Ki Bin. Just one last question on Puerto Rico. I -- What were some of the reasons why those 2 assets were more sellable quickly versus the rest of the portfolio?

I don't think we said that they were more sellable at all. I think that we looked at them and decided that those were two assets that were outliers in our portfolio for location and anchor type reasons. And a relationship with Ben Schneider, in our office here resulted in the buyer that found some value in those properties at a reasonable price.

Okay, and like you mentioned, If I look at the average base rent for those assets, it was fairly little bit lower than the average rate in Puerto Rico, and so that 150 above per square foot or so. Is there anything that we can -- any conclusions we're going to offer them for the remaining assets that are somewhat much higher in base rent? And how we compared that to the 8% cap rate or is it just too many variables?

Well, that the ABR variable which normally I would say is an interesting indicator since this one had a pretty low rent Kmart way out on the west side of the island, it's a little bit difficult to use that as an indication. If you wanted to pick one fact, to put a rink fence around and understand transactions and why something got done is probably the size of the deal. Two properties, less than $60 million financeable, private buyers, intelligent buyers would understand how to operate and have a long history. So those ingredients are important in terms of asset sales and you're probably seeing that through most of our asset sales, we don't really have items that are $100 million plus transactions happening right now, in much of the country.

And that capital was fairly economic, right? I mean those assets were full?

Yes.

And just last quick one. The notes receivable on the balance sheet went down, anything to note there?

There's one, the north ridge is one of the transactions listed out on the pages of mezzanine loan payoff in the second quarter.

The next question comes from Carol Kemple of Hilliard Lyons.

This is just a question regarding modeling. You all talked about a make whole provision from the bonds, I think you said it was going to be $7 million next quarter. Will that be included in NAREIT FFO but excluded from Operating FFO?

Yes.

The next question comes from Wesley Gooladay of RBC Capital Markets.

In your negotiations with tenants, where are you getting the most push back, is it the initial rent? Is it the contractual bumps? The TIs? Is there any color on that?

All of the above. Generally we get push back on everything. But as far as a trend of late and where we are seeing the sensitivity on the tenants, I think it tends to be a balance between the overall rent in the CapEx and making that all work for us and work for them.

That's not a new phenomenon.

There's nothing new about it but honestly tenants are tough, particularly, the national chains and the mom and pops generally are left off.

You probably have, I guess -- we had heard something of some other landlords, private landlords that the contractual bumps might have been under a little bit of pressure but not drastic like, some people are thinking with business sound like that's the case?

That is not the case.

The next question comes from Christopher Lucas of Capital One Securities.

Just a couple of quick questions. David on your portfolio review, and as you are lining up the buckets. What was the timeframe that you were sort of underwriting as you thought about where the opportunities were in terms of the durable growth and redev?

Well, the timeframe of our modeling is 10 years. I would say that if you are looking at the durability that should be somewhat consistent across the term of the 10 years because that's more the definition of slow growth and durable. The second bucket, the growth vehicle, it's usually because there are some occupancy upside or there's some near-term idea that allows for growth and the redevelopment bucket is usually little bit in the out years because it involves some negotiations with city governments, with tenants on consent letters. And so part of that feeds into a long-term business plan where you have kind of near-term, midterm and long-term growth ideas.

Okay, great. And then for the impairment for the quarter that was taken, can you give some color on that asset?

It was a variety of assets, Chris. It wasn't just one asset. Who was -- I'm sorry.

It was one shop.

It was one shop? It has a little bit of a history with the land parcels as well, right. Christa, you want to...

Sure, it was just a shopping center which under the accounting rules, for the most part that's -- gets triggered -- any time there is some sort of a change in what your hold period is, so that's just an asset that we're now looking at putting in our disposition bucket. And then there was -- and then also 2 undeveloped parcels of land which again, just been change in assumptions with how the team is looking at what those parcels are, what we're going to do there.

Yes. Okay, and then David, you mentioned that on the Puerto Rico transaction debt that financing was involved. Is there any color you can provide, in terms of what the general terms were leverage wise? Or anything like that, as it relates to the financing terms, anything?

There's really not.

Okay, and then just last question. On the -- you mentioned you that got -- you still see enough bids to sort of give you confidence about getting things done? Are you seeing any deferred dispersion widening as it relates to bids your seeing? Or is it still sort of been consistent in terms of where bidders are coming in as a group?

Domestically or in Puerto Rico, Chris.

I think domestic, it doesn't matter, just a broader question.

Do you mean if there were 3 bidders, are they widening out from each other, is that what you mean? Or you mean...

Yes. So if you had -- so if the normal bidding process had been say, you're getting 3 to 5 bids and there was a coalescing of the rent -- there's generally coalescing with one outlier right, that's the winner. So -- or is that dispersion getting -- is that -- is there a change to that dispersion of how the bidding as we're getting low bids? Just give me your sense as to sort of how consistent has the bidding been?

Yes. I guess in the last 90 days, I don't think that we've seen it differently than it has been for 10 years, meaning when there are assets that are highly understandable, i.e. single tenant one lease, 10-years long, fixed rent. The bidding pool tends to be closer together and when there are assets that involve assumptions on renewals and options triggers, then the buyers tend to have some aggressive assumptions and some conservative until they tend to widen out. I think that's consistent with the last 90 days and I don't really see that changing. I think what would be to mean, more of an indicator of the market is if the people that come in to the tent to actually make bids on an asset starts to decrees and so far it's in the secondary market it's been somewhat consistently small.

This concludes our question-and-answer session. I would like to turn the conference back over to David Lukes, President and Chief Executive Officer for any closing remarks.

Thank you all very much for your time and we look forward to next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.