Site Centers Corp (SITC) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to DDR Corp.'s First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brandon Day-Anderson. Please go ahead.

Good evening, and thank you for joining us. On today's call, you will hear from President and Chief Executive Officer, 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 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 today and the documents that we file with the SEC, including our Form 10-K for the year ended December 31, 2017.

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 www.ddr.com.

For those of you on the phone who would like to follow along viewing today's presentation, please visit our Events section of the Investor Relations page and sign in to the earnings call webcast.

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

Good evening, and thank you very much for joining our first quarter earnings call. Last quarter, I highlighted 3 key areas of focus, namely our return to growth, our balance sheet transformation and substantial leasing opportunities embedded in our portfolio. Our 1Q results provide evidence of progress on all 3 of these fronts. First, the RVI spin remains on track, moving us closer to the end of the dilutive deleveraging process. Second, New DDR posted compelling leasing economics and strong same-store NOI growth despite tenant bankruptcies. Finally and most importantly, New DDR's curated portfolio is allowing us to assemble a value-accretive redevelopment pipeline.

Now on to the business of the call. I'll review our results and then provide an update on growing redevelopment opportunities and recent DDR transaction activity. I'll then hand the call over to Mike for comments on operations, and we'll close with some comments from Matt on the balance sheet, RVI and guidance.

Operating FFO in 1Q was $0.03 ahead of our budget but down from last year as dilution from deleveraging weighed on earnings. As I mentioned, we expect this headwind to end in 2018. Operationally, the first quarter demonstrates the high quality of our real estate and sustainable tenant demand with solid leasing economics within the New DDR portfolio highlighted by 21% new leasing spreads and 2.6% same-store NOI growth. This positive momentum was driven by rent commencements on a range of previously vacant anchor spaces and continued small shop leasing progress. These results are solid by any measure and were ahead of our internal expectations.

Results, including the RVI, continental U.S. assets, weren't bad either with 1.5% same-store NOI growth. Overall, our portfolio clearly performed well this quarter despite difficult occupancy comparisons.

Going forward, the Toys bankruptcy generates some challenges in the form of additional vacancy, but the headwinds will be partially mitigated by the backfill of vacant space and continued small shop leasing. More importantly, these empty boxes also allow us to recapture control of space and parking fields at some of our best assets, facilitating economically attractive redevelopment projects.

One of the characteristics that we looked for when curating the New DDR portfolio was land use efficiency. In other words, we favor properties with a strong likelihood of increasing in value as current tenants expire or lose their lease control. Control is the key feature that allowed us this quarter to move forward with 3 new redevelopment projects, which are now listed in our supplemental.

In Brandon, Florida, Kmart controlled 100% of the common area and 58% of the site GLA through their long-term lease. We purchased a termination, control now the well-located site and have 0 current direct exposure to Sears or Kmart in the New DDR portfolio.

At Sandy Plains Village in the Atlanta MSA, we purchased a termination of Walmart, which controlled 60% of the common area and 34% of the GLA. We now control over half of this site within a high-income neighborhood.

At Shopper's World in Framingham, Massachusetts, we've been holding certain spaces vacant and renegotiating clauses within other existing leases in order to facilitate a new site master plan. The last critical check piece fell into place when Babies "R" Us liquidated, and we now have control of a meaningful redevelopment zone.

All 3 of these locations are in active dialogue with zoning and planning departments and have progressed well over the course of the last 9 months. In the coming quarter or 2, we hope to be in a better position to share our detailed plans for the properties as well as preleasing progress. But suffice it to say, we are increasingly excited about the retenanting and densification opportunities on these well-located sites, which will become a larger part of our story in the future.

Shifting to transactions. We closed on the sale of our first RVI asset last week. Specifically, we sold Silver Spring Square in Harrisburg, Pennsylvania for $81 million to an institutional buyer at better economics than transactions closed to date. This is a solid beginning to the RVI disposition process. We're making progress on additional transactions, and we'll provide more information on RVI asset sales as they occur.

We'll also continue to execute on our original $900 million disposition program, selling over $370 million of assets in the first quarter at a blended cap rate of about 7.4% and closed an additional $189 million subsequent to quarter-end. First quarter transactions included the first portfolio deal we've done in some time, the sale of 9 Publix-anchored centers in our Madison joint venture to Publix as part of the retailer's initiative to increase ownership of centers in which it operates. As our disposition volume for the last year indicates, our top-tier transactions team continues to execute at a breakneck pace. Asset-level debt markets are open, private market buyers are active, and our recent activity gives us confidence in our ability to execute.

Before handing the call over to Mike, I'd like to close by restating how excited our whole team is with our impending shift from a capital allocation strategy focused exclusively on deleveraging to one focused on redevelopments and opportunistic investing, all of which is afforded by a curated portfolio of assets with outstanding locations. The incredibly dynamic retail environment in which we find ourselves certainly provides its share of challenges, but I strongly believe it increasingly provides opportunities for profit as well, opportunities we intend to pursue tirelessly. We are eager to share our thoughts in this environment and our business strategy, something we intend to do in detail at an Investor Day we will be hosting in New York City on the 11th of September. Please keep your eyes peeled for a Save the Date with more details in your inbox shortly.

And with that, I'll turn it over to Mike to review some key operating conclusions.

Thank you, David. I'll start by summarizing the 3 key operational takeaways: one, same-store NOI growth in the continental U.S. was strong; two, leasing spreads were robust; and three, Puerto Rican operations were better than expected.

On same-store NOI, as David mentioned, first quarter growth for the New DDR portfolio was 2.6%, which was ahead of our budget. Results were fueled by ongoing progress refilling box vacancies as well as commencement of rent from the greater volume of small shop leases we began signing 6 months ago.

Second, in the continental U.S., we continue to make steady progress on the leasing front. Importantly, New DDR's occupancy was flat overall compared to last quarter, and our small shop leasing program remains in focus. Total leasing volumes for all spaces were roughly in line with the trailing 12-month average, and blended New DDR leasing spreads were nearly 9%, roughly in line with last quarter. Refilling Toys boxes will require some CapEx, but given the mark-to-market and redevelopment opportunities David mentioned, we believe the returns on this capital will be attractive.

On Toys "R" Us, we now have 2 boxes rejected in the bankruptcy process that have closed, 2 additional stores with assumed leases and 1 space that we recently purchased. While we do not have yet timing specifics on the other 16 leases, we have budgeted the balance to close within the next month or so.

In terms of overall operating environment, conditions remained generally unchanged. Tenant demand remains steady, and the quality of New DDR's assets is high enough that our properties remain highly sought after by all the expanding tenants with whom we do business. We have so far seen minimal impact to supply/demand dynamics from the Toys' liquidation announcement.

In Puerto Rico, first quarter operations were steady versus the fourth quarter, good evidence of the resilience of our assets. We continue to make strides operationally, especially on repairing damaged spaces and keeping our centers well occupied. I mentioned last quarter that we opened the island's first Dave & Buster's location at Plaza Del Sol, and we now have feedback indicating that this opening was the chain's strongest ever.

I am pleased to report that our Plaza Palma Real shopping center, which incurred the most damage in the hurricane, had a grand reopening of its Walmart anchor just last week with traffic consistent with a typical Black Friday. The recovery story is compelling, and we are seeing positive sales comps at key national anchors like Walmart and Home Depot.

Our lease rate fell approximately 250 basis points since the fourth quarter, a product primarily of the closure of our only Toys "R" Us box on the island. Rent on that space was in the low single digits, limiting the NOI impact of the closure.

In all, I'd say that despite challenges, Puerto Rico is doing much better than many would think. I'd like to extend a huge thank you to our construction and property management teams based both on the island and in the continental U.S. for their help with the work to date.

With that, I'll hand the call over to Matt.

Thanks, Mike. I'd like to make some comments on our balance sheet and then provide some color on guidance and RVI before handing the call back over to the operator for questions.

First, on the balance sheet. We continue to target pro rata net debt to EBITDA of roughly 6x by the end of 2018. It takes time to lower leverage, so we've aggressively addressed our maturity structure as a way of lowering risk in the interim.

As a result of both our 2017 bond financings and the tender offer associated with the RVI mortgage, New DDR's pro forma average debt maturity of 6.3 years, excluding the RVI mortgage, is now among the highest in the peer group. Pro forma for RVI and dispositions, we have only $179 million of debt or less than 10% of our debt outstanding maturing prior to 2022.

Debt to EBITDA increased modestly from 4Q despite additional asset sales. This was a product of the full quarter EBITDA impact of the high volume of late 4Q dispositions as well as $56 million of debt extinguishment costs incurred in the quarter related to mortgage repayments and the unsecured bond tender.

Likewise, our secured debt ratio rose this quarter, which was a product of the $1.35 billion RVI mortgage loan and the repayment of unsecured debt. We expect all of our bond and leverage metrics to improve in the back half of the year when RVI and its mortgage are spun and we complete the core DDR disposition program.

Included in our transaction activity disclosure is an additional $36 million repayment of preferred securities associated with our 2 Blackstone joint ventures. As a reminder, we established a valuation reserve for these securities roughly a year ago, cutting value by $76 million to $270 million. Since then, we have achieved key sales threshold levels at both joint ventures, allowing us to receive approximately 50% of equity proceeds from asset sales going forward. We recognize a current 6.5% yield on the preferred securities, so every dollar we get back is the earnings equivalent of an asset sale at a 6.5% cap rate.

The ventures have sold a total 38 of the 82 original assets as of March 31, generating total preferred repayments to us of $91 million. We mark all Blackstone assets to market each quarter, resulting in a $15 million preferred valuation increase in the third quarter of 2017 at a $4 million decrease this quarter. We're making great progress selling assets, reducing our investment in those JVs and lowering DDR's leverage as a result.

I'd like the draw your attention to some changes we made to our redevelopment disclosure on Page 16 of our supplement. We renamed the Minor Redevelopment category Tactical Redevelopment and have taken a more conservative approach to the projects listed in this category. Projects we removed will now appear in our recurring leasing capital expenditures that we report each quarter. What's left in the Tactical category are smaller redevelopments, generally in the $2 million to $3 million range, including first-generation space, expansions and out partial development.

A final earnings housekeeping item worth mentioning is some of the ongoing accounting associated with Puerto Rico. We received and recognized an advance of our business interruption insurance of $2 million this quarter. This is lower than the $8.5 million we received in the fourth quarter of 2017. The smaller BI advance this quarter represents good evidence of tenant reopenings and rent payments as we continue to recover from the hurricane.

In the case of both payments, the advance represents only a portion of the ultimate BI compensation that we expect to receive for those time periods. With the return of normalcy to our assets, we expect these payments to remain at lower levels. Our current estimate of total cost, excluding business interruption, remains approximately $150 million, consistent with last quarter. We continue to work with our insurer to reach agreement on a final payment amount and settlement.

I'd like to now touch on a few comments on our projections. Looking ahead to the second quarter of 2018 results, I'd like to flag a couple of items. First, we expect the second quarter to mark the weakest same-store NOI growth rate of the year, largely because we start to feel the brunt of the Toys closures ahead of expected rent commencements of released former hhgregg and Sports Authority spaces later this year.

Likewise, OFFO per share should decline sequentially in the second quarter, largely a product of a full quarter impact of the higher interest rate -- of the higher interest expense associated with the $1.35 billion RVI mortgage loan for an entire quarter as well as lower JV fee income and NOI from dispositions.

On RVI fees, additional asset sales could adversely impact the property and asset management fee guidance of $10 million that we outlined last quarter. That said, timing of sales is inherently unpredictable, so we are not revising guidance for those items. As we mentioned previously, we remain highly focused on our DDR expense structure and have made adjustments so that any decline in fees will likely be offset.

Lastly, our key 2018 earnings assumptions and guidance is unchanged, including the expectation that we will achieve at least 1.5% same-store NOI growth and operating FFO per share of at least $0.15 in the third quarter, which is based on the assumption that the spin of RVI occurs in early July. We had anticipated a potential Toys liquidation when we first provided our forecast last year, so this outcome is not sufficient for us to change our NOI growth expectations.

Turning to the spin of RVI. We remain on track for a mid-2018 effective date. The loan securitization process is now complete, locking in a rate of LIBOR plus 315 basis points. Given the current market uncertainty, I am thrilled that we achieved an all-in rate of about 5% on this $1.35 billion deal. We are going through the requisite registration process with the SEC, hopefully putting us on track to consummate the spin-off in early July. The closing and securitization of the RVI mortgage loan represented the last major hurdle to the spin of these assets.

With that, I would like to turn the call over to the operator for your questions.

(Operator Instructions) Our first question comes from Michael Bilerman with Citi.

It's Christy here with Michael. We've been hearing about some recent layoffs at DDR. Just maybe you can provide some color on that. What departments within the organization were most impacted? And were these anticipated in the context of the prior G&A forecast?

I would say that the changes we had over the past week were exclusively due to the fact that the company has gotten smaller. We have a strategy that has included deleveraging. We're working on a spin-off of certain assets, and I'd say our company is now right sized for that strategy, which we outlined in December.

And then, David, you talked a lot about the redevelopment pipeline in your opening comments on a go-forward basis. You added 3 new projects in Q1. How do you feel like you're positioned today within the organization to ramp up redevelopment activity? And Matt, maybe you can also provide some comments just from a funding and balance sheet perspective on a go-forward basis as that -- some of that ramp up occurs.

Sure, Christy. If you think about the scope of a redevelopment project, you can say that there's 3 phases. There's the control phase, where you have to gain control of the property from the tenant leases. There's a consent phase, where you have to get approvals from municipal government. And there's an obligation phase, which you're trying to lease tenants that have an obligation to pay rent, which is a reason for making the investment. Our staffing right now has been increasing, not decreasing on the development staff. We have new staff in Columbus. We have new staff in Atlanta. We have new staff in the Southeast, frankly, to fill up some of these new pipeline of investments. And I think you'll see our team continue to grow as these projects moves from the control through the consent and to the obligation phase. We'll simply staff up to sell those projects over the coming years.

In terms of funding, Christy, to answer that part of the question, I mean, obviously, we have $1 billion line of credit for any bridge financing needs we have there. And I do think the funding needs will ramp slowly here, so it's not like we're going to face a wall of capital requirements. But we will continue to recycle capital, and we do generate some free cash flow as a result of the new dividend. So we have a variety of sources we can draw from there.

Our next question comes from Ki Bin Kim with SunTrust.

Actually, I just want to follow up on Christy's question. How is employee morale overall at DDR? And I know you guys when you were at Equity One changed some of the KPIs and how people were structured and compensated for different things. Any comments on that?

I think everything is moving along pretty well. I think people are excited about the future. We've been talking a lot about the redevelopment projects. We've had a lot of group meetings with the leadership team, most of which are in the room here today right now, and I think everyone is looking forward to the next chapter.

Okay. And so no major changes on how people are measured on leasing? Or anything major?

Well, Ki Bin, I think you remember over the course of the past year, Mike made some pretty substantial changes to the leasing compensation. His leadership is also in the room here today. And I would think culturally, the whole company is going to eat what they kill, and that starts with the sales side of the business. So the leasing culture this year is more likely to be more profitable personally than they were last year because they're going to do an excellent job of leasing.

Okay. And your same-store NOI. I noticed your OpEx was down. Any color on that?

No. I don't have a specific comment on that. I can follow up with you off-line.

Our next question comes from Todd Thomas with KeyBanc.

Just was wondering if you can just comment a little bit on the disposition pipeline for RVI assets now that those assets are all in the market. Maybe just some color around the level of interest you're seeing for those assets, both the domestic portfolio and also Puerto Rico.

Sure. I'd be happy to, Todd. Let me just clarify one thing. When we say in the market, I think there's 2 ways to look at that. The first is that when we announced the spin of a company whose purpose and business plan is to recognize any of these through asset sales, we're effectively communicating that all of the assets are for sale. All of the assets are not in the market listed with brokers right now, so we're selling the ones that are in good position to be sold. We've gotten a lot of good feedback from the market. The only one where we have definitive data is the first one to close last week, which we mentioned in our prepared remarks. And as projects get further along and do indeed close, then we'll offer some specifics along the way.

Okay. And are you able to share a cap rate for the Silver Spring deal? It looks like it was sort of a low 7% cap rate on in-place NOI. Is that right? And also, the $66 roughly million of debt that was retired in conjunction with the sale of that asset, that paydown goes toward the $1.35 billion mortgage. Is that right? Or is that not necessarily the case till the spin is complete?

First of all, you're correct. When you sell a property to an institutional investor, most of time, there's an agreement that we won't share cap rate, which is unfortunate. But the proceeds, a portion of it goes down to pay down the debt. There's also an overage beyond the release price, which builds up kind of a pool that we can use if other asset sales don't go so well. So this one was pretty much good news all the way around for RVI.

Okay. And just one more. The Toys "R" Us box that you acquired, are you looking to acquire any additional Toys boxes in the portfolio? And any sense how many more might be assumed?

We absolutely are interested and intrigued by acquiring more of Toys boxes within our New DDR that we find useful for redevelopment. But I can't give you an expression as to how many.

Our next question comes from Rich Hill with Morgan Stanley.

Just wanted to go back to maybe some of your prepared comments. If I understood it correctly, Toys liquidation was anticipated in your guidance. I think that, that was referring to the 1.5% same-store NOI for New DDR. You put up a pretty decent number for New DDR this quarter of I think around 2.6% or so. So how should we think about that for the rest of the year? I mean, why not raise same-store NOI guidance at this point given the big number you put up, particularly if Toys "R" Us was already baked in?

Yes, I would say it's baked in. This quarter, we didn't really feel much Toys "R" Us. We will feel the Toys "R" Us as the year progresses. So you would rightly expect, holding all else equal, that things should decelerate from here.

Understood, okay. And then just one more question, I guess, going back to your sale of assets. I know you can't disclose what -- or you're not wanting to disclose at this point how much is in the market. But are you sensing that cap rates are coming in better than your expectations for maybe the 7% to 8% range where you've been selling previously? Or how have discussions been going with prospective buyers?

Let me just be clear on what we have in the market just to make sure that there's clarity. Certain assets are right for sale when you have leases that options have been exercised, for example, or we've kind of prepped the property for sale. And it takes time to do that. One of the beauties of the RVI business plan, and particularly the CMBS debt that we have on it, is that it gives us a couple of years to execute on a business plan, which means the leasing department, the property management department can all get together and make sure that the properties are well positioned for sale. By doing that, you appeal to a much wider group of institutional buyers, and usually, the pricing ends up better than if you simply have a transaction and dump something on the market. So I feel very good about the pace of dialogue between buyer and seller. We do have a huge inventory on the market right now. But as you can see, we've been selling a couple of hundred million dollars a quarter. And it feels like on an individual asset basis, we're getting plenty of dialogue. As the prices come in, we close deals. We'll see over time how it's going to relate to our original projections.

Got it. Just one more quick question. I guess the assets that you sold away from -- that were not included in RVI, did I hear that correctly that those were at 7.4% cap rate?

Yes.

Our next question comes from Alexander Goldfarb with Sandler O'Neill.

Just a few questions here. The first is just going back to Christy's on the layoffs. Some of the folks that we had heard were involved were some of the like senior folks, some of the senior leasing. So can you just -- I mean, obviously not asking for an org chart, but just in general, it sounds like you've also been doing some hiring as you do redevelopment. So have you been restructuring the leasing and maybe bringing in new leasing people? Or just want to reconcile what we've been hearing with the way you guys have been implementing your strategy.

Yes. I appreciate that; that is a valid question. The reality is that there's enough experience in this room to have an opinion as to how to run the day-to-day operations of the company. And we're simply going to do what's best for shareholders along the way. In some cases, that means opening new positions, for instance, in redevelopment in other parts of the country, not in Cleveland. In other times, that means hiring new positions in Cleveland or promoting people from within the company, which we've had a number of over the past month. But when it comes to positions that are no longer available at the company, it's really due to size. The company has changed dramatically in size but not dramatically in focus. We're focused on a much smaller group of assets. And I think you are already seeing the fruits of that focus by getting assets into the redevelopment pipeline.

Okay. And then, Matt, is there a severance charge that we should expect in the second quarter associated?

Yes.

Okay. Can you quantify?

Not this time.

And then just the final question is on Otto, he's remained an active supporter of the stock and buying. Are there limitations in his -- whether as a foreign entity or his original agreement with the company that limits how much of the stock he can own? Or is he sort of free to acquire as much as he wants? Within the 5 or fewer rule, obviously.

There is information you can look up. Effectively, his organization is restricted to a maximum of 29.8%. Right now, if you go look unto data, I think you'll see that he's somewhere between 18% and 20%. And he's been a strong supporter of the stock, but more than that, I would say both Alex and his colleague, [Thomas], have been an absolute pleasure. And they're heavily focused on the real estate, and they share operational ideas. So we're certainly proud to have him between 18% and 20%.

Our next question comes from Vincent Chao with Deutsche Bank.

Just want to go back to the disposition commentary a little bit. It sounds like you continue to sell these in volumes here and getting pretty good interest on the RVI assets that are out there. Just curious if there's been any change in some of the larger properties. Where were hearing of less demand for properties greater than, say, $50 million or so.

Yes. I think to be perfectly honest, it's a little bit of an untested question for the RVI asset sales. We happened to sell the first one with $80 million. A number of the other ones that we're working on are smaller. It's just so happens that a couple of the largest assets within RVI were waiting for certain tenants to exercise options over the next couple of months. So I'd say we're going to be a little bit delayed before we all see the results of larger assets being sold. There is an important feature that we were able to get into the CMBS mortgage, and that is that we do have the right to separate some of the larger properties into smaller components. So for instance, we could sell off some of the net lease parcels. We can separate assets into entertainment sections, grocery sections, power sections. So it's likely if we see the results of what you're suggesting, that the pool is larger for smaller assets, then we'll likely list these in smaller components.

And just to put a finer point on it, I mean, we have -- as much as -- this is a concern we've had and lots of people have raised over the last -- not just the last couple of months but over the last year or 2 as there's been less institutional participation in the private capital markets for these assets. But I would just point out, I mean, we did sell -- we said Silver Springs and we give you enough information to know that was a pretty decent cap rate. And we also sold another asset for $66 million this year. There's been a couple of them that are very decent-sized assets. They obviously would have an outsized impact on our cap rate that we disclosed during the quarter if they were really terrible cap rates. So I think you got enough to know that at least as of right now, from the stuff that we've been doing, the market is not way out of whack.

Okay. Thanks for that. And then just going back to Toys as well. I think last quarter, you quantified the impact in the 1.5% as about 70 basis points. Just given the timing of when the stores will close, I mean, does it seem like that number will be significantly different just given the total exposure of about 1.5% or so but half-year convention there?

Yes, that's about right.

Okay. And then one final one for me. Just on the lease commence spreads, I mean, we already talked about 2Q being the max pain for same-store NOI growth because of Toys and ahead of the openings that are already filled. I guess should we expect 3Q and 4Q openings to be relatively ratable? Or do you think it will be more 4Q weighted?

It's a little early to say, Vin, and I want to be very -- I'm always hesitant to kind of do the quarter-by-quarter stuff because we can pretend that we have more precision here than we really have. The reality is, as I said, 2Q will be a bit weaker. You'll see better numbers than that in the 3Q and 4Q, but it's hard for me to give you exact numbers there at this point.

Our next question comes from George Hoglund with Jefferies.

I was wondering if you could give some color beyond Toys "R" Us for store closings. What are your expectations, at least from some of the larger tenants or some of the tenants where you expect to get more boxes back?

This is Mike. I think the general answer to that is that we're very mindful and cognizant of a lot of the speculation that's out there. And 2 things. Number one, we're always focused on those spaces when there are subject tenants that have some concern. But I think from a bigger picture standpoint, I think one of the things that's important to stress is the fact that when we selected our portfolio for New DDR, we really didn't consider the presence or absence of the tenants that are on the risk list, if you will. We really focused on the real estate. And so we feel very confident that if something were to transpire where there were more losses, we'd be in a good position because of the quality of the real estate.

But there's nothing thematic. If you look at kind of -- we do all of our forecasting and budgeting space by space. You wouldn't see anything particularly thematic like a slew of boxes from one particular tenant or anything like that. There are one-offs that we know about, but there's nothing that you would see that was particularly, I think, interesting or along one particular theme.

Okay. And then as far as backfilling any Toys boxes you get back, I mean, do you envision these being more so boxes getting split up and redeveloped? Or are there -- is there tenant demand who backfill a whole box?

I think it's going to be a variety of approaches. As David mentioned, several of these we're really gaining control so that we can do some redevelopment around the real estate. But I do think it will be a combination of a handful of tenants who might take the entire space and a significant number of tenants which will split the space into multiple tenant uses.

Okay. And just last one for me. Any sense that elevated level of store closures will impact the pace of asset sales?

Well, I think there's -- Toys "R" Us liquidation already had an impact on a couple of RVI assets because they were tenants. So we have to decide whether we're going to release those and sell them at a later date or whether we're going to sell them with a potential vacancy. So yes, there had been some impact, but the general buyers' environment right now is not heavily focused on store closing. It's really focused on the durability of the existing cash flows. And a lot of the assets that we're selling are very strong properties that happen to be in these submarkets, but you can measure the cash flows and feel pretty confident that it's durable.

Our next question comes from Wes Golladay with RBC Capital Markets.

I just want to follow up on the last questions on Toys "R" Us. What do you expect the overall budget for a carve-up landlord work in TI to range for, for the Toys "R" Us? And who are some of the large-format tenants that just may assume the boxes?

So the first part of that question is the range is so great that it's really impossible answer in one fell swoop. As far as prospective tenants interested in the boxes, there's a handful out there that range from larger-format grocery operators to other national box tenants.

And Wes, you'll notice that we did have one box assumed by Raymour & Flanigan at our Princeton asset. So that is a single user of a single large box. So as Mike said, I think it's just too early to know on the CapEx side and what the outcomes are going to be. We're working on it, but there's just no easy answer yet.

Keep in mind, the Babies "R" Us spaces are in the 30,000-foot range. So they're not exactly large boxes. They're more junior boxes. So it's very feasible that those could be single users. And some of the Toys boxes are larger, which are the more likely candidates to be split.

Okay. And then you mentioned a lot about getting control of the properties to do large-scale redevelopments. Is there any marquee project that you can do maybe in the next 2 or 3 years that you could highlight that you're just trying to get control of right now?

I would be so incredibly enthusiastic to highlight that once we actually have control. Look, we already got control in Shopper's World, which is fantastic. I mean, that trade area is massive, and I think this whole company has looked at Shopper's World for probably a decade, wishing we could do something and now we have a chance. So there's a lot of good news stories that I think the culture here is pretty enthusiastic about. Gaining control of a couple of hundred thousand square feet of anchor space, which basically means 0.5 million square feet of land, is a lot for a company of our size in one quarter. So we've got a great road ahead. Whether we're successful on winning some of these bids for additional Toys boxes, we'll see over the next couple of months.

Okay. And then last one for me. How should we think of co-tenancy? Is there an issue we need to be concerned about if we have multiple boxes and a center close? Or is that not just the way it works?

Overall, that's not a major concern.

Our next question comes from Nick Yulico with UBS.

Just going to the -- you gave the net effective rent numbers in the supplemental, which is helpful. But can we get a feel for what does that number look like on like a releasing spread basis?

So you're saying net effective, I haven't calculated that. We can look at doing that, Nick, but I don't have that at my fingertips for you. It's a good question.

Okay, yes. I'm just wondering if it's anywhere close to the releasing spreads that you cite otherwise.

I would say -- I'll speculate here, and I would say I don't think you're going to see a massive difference there. When you retenant a box, you spend money. So whether it's the second generation, the third generation, the fourth generation, you spent money. And so I think -- and those costs have not inflated massively. So my instinct would be that you might see a somewhat lower number, but it's not going to be a dramatic change.

Okay. And just one other question is if you look on that page on the new leases for the total CapEx and the life of the lease, it looks like you're spending about, call it, roughly $50 a foot for these new leases. I guess the question is, is there additional redevelopment capital that's not shown on this page that we need to assume above and beyond that $50 a square foot as we think about Toys, those boxes, how do you deal with that or even other future boxes that might come up?

No, I think I believe very strongly that these numbers are fully loaded. There are other projects that we do that have nothing to do with this leasing that aren't in these numbers, obviously, but as it relates to doing leases and all the costs you can think of associated with that, we're really trying to fully load these numbers.

Our next question comes from Vince Tibone with Green Street Advisors.

Could you discuss how new anchor vacancies impact the planned disposition at RVI? At centers where an anchor closes, are you going to try to release that space before sale? Or do you sell the center with significant big-box vacancies? Like how do you balance kind of maximizing price versus getting maybe quicker execution on some of these planned dispositions?

It's a very prescient question, right, over the past month, and I think the answer surprisingly depends on the buyer. Like they always say, if a man wants a blue suit, sell him a blue suit. And right now, the buyers tend to prefer properties that have some storylines, some upside component. And so the cap rate tends to be actually better when you've got some liquidity in the junior anchor space and there's something to do on the property. So some of them where we have anchor vacancies, we will be selling into the market so that someone else can buy an idea, can buy a dream. There's other properties where if it's a really large piece of the total NOI for the property, then we'll pull it for the market. Our leasing guys will take care of it, and we'll probably put it on the market sometime next year.

That's helpful color. You also mentioned the potential to cut up larger centers to get better execution on the sale. Is there an active market for vacant anchor boxes? Like is that potentially an opportunity to just sell kind of vacancies and the kind of upside potential there? And then related, like what is the ballpark value in your mind of a dark former Toys "R" Us box?

Generally speaking, there is definitely a market for vacant boxes if it's on a separate land parcel that has its own cam and doesn't have a reciprocal easement agreement with an adjacent property. So a stand-alone department store or a stand-alone Toys "R" Us that's on an individual parcel. But if it's part of a larger collection of boxes and a junior anchor center or if it's buried within a grocery anchored property, there's almost no market to individually sell those assets. Some buyers historically have tried to purchase the leases and be a sandwich position landlord. But generally speaking, the highest and best function for RVI would be to sell an entire property altogether as opposed to splitting out the vacancies.

Your next question is a follow-up question from Michael Bilerman with Citi.

David, I was wondering if you can provide some update in terms of new board members for new DDR and where you stand in the process and the timing of those announcements?

I'd be happy to. You probably noticed in our disclosures, if you think about since I started a year ago, we had one new board member, Jane DeFlorio, who started about a year ago. The announcement of the RVI spin has released the fact that 3 board members will be leaving DDR proper, i.e., New DDR. Two of them will be going on to the RVI and one is not seeking reelection. And so what that means is by the time we get through the proxy season and into the spin being completed, we need to put a new independent director, at least one on both boards. So a total of 2 or more independent directors is what we're in the market for. And I think you would have to see an announcement before the spin takes place. On DDR's board, that could be the remainder of the year as we look for the right individual.

And I guess where are you in that process? Are you down a couple of candidates at this point? Do you feel confident that you're going to have those?

Yes, I feel great. We've met a lot of people. We've networked and asked the opinions of a lot of folks in the industry to give us some ideas. And we've met a wide and pretty diverse range of people. We're interviewing for both boards, and so it is exciting to think about the skill set that's required for each different business plan. And that I think we've got a lot of people recognize that the 2 unique business plans would be exciting to be on as a director. And the director world of candidates, I think, has been really healthy for us to select from.

Matt, if you look at Page 10 of the supplemental, where you have the same-store disclosure for the company at 100% and then DDR at your share and obviously then break it out between New DDR and RVI, there's a pretty wide gap between the total portfolio, which includes all the Blackstone and other joint ventures where you are a minority partner and the total DDR. Simple math would indicate that those joint ventures are actually potentially even negative from same-store perspective. Is there anything that you can highlight about the differential between sort of all the joint venture assets and how those are performing versus wholly owned assets?

Yes, it's a good question. So yes, I think you can do the math and figure out that the JVs this quarter at least were negative. It's hard -- and from the net we look at. It's hard to generalize, Michael. I would say that not only do you have a lot of assets that are in JVs, but you have a lot of different JVs in that overall pool, right? And some of those JVs have really, really great assets and some of them have less great assets. And without getting into all the gory details, you'll see some differential performance there. But I think that the negativity there hasn't been long standing, and so I don't think we're expecting that to continue. But you're right, there is some divergence in performance.

Okay. If you look at the top of the page, excluding Puerto Rico and the commence rate, at least on the leasing perspective, it's not that different. So I didn't know if there's other things going on. I mean, the expenses are playing into part of it, which I'd love to be able to know. Your recovery rate effectively has gone up pretty dramatically in the company, so trying understand that differential. I just didn't know if there's other maybe onetime things or happening to cause that differential.

It's not. I would love to be able to point the kind of 2 easy bullet points to give you. And again, I think it's something we would look at, but it's not an easy story like that. It's a variety of different pieces.

And nothing on the expense side jumped out at you? You look at these numbers, right? The operating expense is down 5%. Realty tax is down 1.5. But your recovery is only down 1. There wasn't anything in particular there that made this quarter an anomaly?

No, not really.

Thinking about the joint ventures on Page 23, and I know you're sort of in the market of selling both wholly owned RVI as well as joint venture assets, how should we think about the remaining joint ventures? And how much of this stays within the company over the next 12 to 36 months, especially given the fact that there's a big mortgage loan coming due in 2019 in BREP III?

So BRE, I think we've been very clear, is selling -- is in liquidation mode, right? It's what's generating -- when we first got here, it's what generated the accounting adjustment there, the reserve. And so you should assume as it relates to that mortgage loan, et cetera, there's a lot of moving parts there. But generally speaking, those assets are being marketed for sale in an orderly fashion. DDRM, you will have seen this quarter that there were some asset sales. We mentioned a portfolio sale to Publix. That JV was formed with the intention of selling certain assets, including those that we've just announced. There will be some incremental asset sales from there. Those are, of course, our largest JV interests. And that kind of gives you a sense for the capital picture for those. The other ones, I would say things are going to be much more one-off and opportunistic in nature and much more difficult to describe in some kind of a thematic sense. We do think they're to be sticking around. They're not in liquidation mode. There may be some trades in assets and back and forth, but really the BRE and the Madison are the big pieces there.

And then a question for Mike. Just Page 12 and 13 on the leasing summary. You look at the new leases signed this quarter, you're about a year shorter on duration. Is there anything going on there? I mean, how much of that is driven by the tenants versus your desire to go shorter duration to get the appropriate rent? I don't know if there were specific leases that's driving that to be shorter as well.

The majority of that is, on our side, looking to get better rents in the long term as opposed to signing up longer-term rents that we're unhappy with.

Okay. And this last question back, Matt, in terms of the release pricing and debt paydown for the RVI loan, the secured mortgage loan. If you sold that asset like at $80 million, what is the requirement then to repay debt versus -- how should -- just some mechanics that we can start thinking about and how that will unfold?

Michael, it's Conor. You should assume 100% of net proceeds from RVI asset sales put down to pay down debt.

And so that asset sale would have been post quarter end, and so that would have not been reflected. So then the mortgage loan will just go down proportionately up until a point and then RVI can have the proceeds?

Bingo.

Our next question comes from Mike Mueller with JPMorgan.

A quick question on occupancy. It looks like New DDR is running at about 93% leased and 90%, 91% occupied. I guess when you just think about that portfolio, what do you think the max is? What can the highest occupancy that you could sustain in that portfolio and the highest lease rate, what can it run at? And then as a secondary question here, as we're thinking about the next few quarters, Matt, you talked a little bit about Toys and then boxes leasing up, the hhgregg boxes leasing up a little bit later. Can you point us toward what occupancy should be doing in Q2 and Q3 sequentially? Should we see a little bit of a dip there and then just to pick up and they hit the back half of the year?

Yes. On your last question, definitely you will see -- as we feel the Toys impact, you will see some impact. Obviously, we would expect occupancy to go down to some degree throughout the year as really largely as a result of that. And that will be offset to some degree by openings that we have of other stores. But really Toys is going to have an impact on the lease rate for sure this year.

And Mike, with respect to the kind of high-water mark for occupancy, the thing to remember is that New DDR is down to 80 properties. I mean, the amount of focus we can have on 80 properties is significant with a staff this size. It's also a group of assets that is quite different. Some of them are traditional grocery anchored centers and some are traditional large power centers. And some are regional and some are semi-regional. We're only focused on creating NAV growth. And so I guess it's going to be a little bit lumpy. It won't be a straight path like you would look at shop occupancy and say, well, in good economic times, I can draw a line from high 80s to mid-90s. This one is going to be a little bit lumpier, but I personally can't see any reason why the 80 assets that's left are not a portfolio that can be very, very highly occupied.

The only mitigating thing I would say to that, Mike, is that as David talked about in the prepared remarks, we are ramping up redevelopments. And so there are definitely some spaces that we're holding back and will continue to hold back in certain properties to create optionality there and hopefully improve the cash flows longer term.

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

Thank you all very much, and we'll speak to you next quarter.

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