Site Centers Corp (SITC) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to the DDR Reports (sic) Corp.'s Second Quarter 2018 Operating Results 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, these statements are subject to risk and uncertainties, and actual results may differ materially from the forward-looking statements. Additional information about such risk and uncertainties that could cause actual results to differ may be found in our earnings release and in 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 release and our supplemental, which is 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 the Events section of our Investor Relations page and sign into the earnings call webcast. At this time, it is my pleasure to introduce our President and Chief Executive Officer, David Lukes.

Thank you, Brandon. Good evening, and thank you very much for joining our second quarter earnings call. Over the last several quarters, I have repeatedly highlighted 3 key benefits DDR offers to investors: A return to growth through our strategic transformation, significant near-term leasing and redevelopment opportunities and dramatic improvements to our balance sheet. I'll briefly speak to each of these and then comment on our quarterly results. First, our strategic transformation was clearly the highlight of the quarter with the completion of the spin of RVI. The end product is 2 distinct companies with 2 different business plans. RVI will look to realize value through operations and asset sales, leaving DDR with a highly focused portfolio of just 78 wholly owned assets. DDR's portfolio was handpicked to maximize property cash flows and to create value for our stakeholders. 2Q earnings provide a sneak peek at DDR's near-term leasing opportunities as well. We produced a notable pickup in activity highlighted by several new tenants to the portfolio that Mike will discuss later as well as continued progress on the redevelopment front. Finally, completion of the spin, combined with our capital markets activities of the last year or so, provide DDR with a strong, flexible and competitive balance sheet. As I said previously, we will continue to work to lower leverage, but we will be seeking to do so in ways that are more attractive to investors than slow one-off asset sales, especially through capital recycling driven EBITDA growth. Now onto the business of the call. I'll review our results and then provide an update on our recent transaction activity. I'll then hand the call over to Mike regarding operations and will close with some comments from Matt on the balance sheet and our guidance. Operating FFO in 2Q was $0.03 ahead of our internal expectations, but down sequentially and year-over-year because of dilution from deleveraging. Upside was driven primarily by a slower-than-expected Toys “R” Us liquidation process, lower-than-expected bad debt expense, early rent commencements from a handful of anchor leases and lower-than-expected G&A cost during the quarter. Operationally, the second quarter demonstrates the high quality of our real estate and sustainable tenant demand with solid leasing economics and volumes, despite our smaller portfolio. Reported same-store NOI growth of 1.4% was, as expected, lower than the first quarter's pace, but it was above our internal expectations. Overall, I'm very pleased with our portfolio's performance this quarter. More importantly, recent recapture of empty boxes provides us control of space and parking fields at some of our best assets, facilitating several economically attractive redevelopment projects. Our work on building an economically meaningful and attractive redevelopment pipeline continues, and we expect to have much more to say on this topic, including locations, volumes and expected economics at our upcoming Investor Day on October 9 in New York. Moving onto transactions. Because of activity in the quarter, we've now completed our original $900 million disposition program with a blended cap rate of just over 7.3%. Over the last 6 quarters, we've sold over $2 billion of assets, exploiting both demand for well-leased assets and healthy debt markets. Mentioning transactions like the spin or billions of dollars of dispositions on a conference call does run the risk of making these achievements look easy. They are not. And we would not have been able to do it without the help of our world-class legal, transactions and funds management teams. 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 recycling capital into redevelopment and opportunistic investing, all of which is supported by a curated portfolio of assets with outstanding locations and strong growth profiles. The dynamic retail environment in which we find ourselves today certainly provides its share of challenges, but I strongly believe it increasingly provides opportunities for profit as well, opportunities we at DDR intend to pursue tirelessly. And with that, I'll turn it over to Mike for some key points on operations.

Thank you, David. I'll start by commenting on leasing volumes and economics and then provide some additional color on same-store NOI growth and capital expenditures. This quarter was the most productive leasing period we've had since joining DDR and trailing 12-month new lease spreads and new DDR of over 20% suggest we're not accepting lower rents to achieve these results. The new leases also represent a significant enhancement to merchandise mix with several tenants that are new to our portfolio, including Floor & Decor; Carolina Pavilion in Charlotte; Kroger's specialty Lucky's Market concept; F45 Fitness at Midtown, Miami; and a full price Nike store in the lifestyle center at Winter Garden Village in Orlando. We also had several notable rent commencements this quarter, including Dick's at Consumer Center in West Long Branch, New Jersey; and 3 TJX concepts, including Marshalls, T.J. Maxx and Sierra Trading Post at Easton Center in Columbus, Ohio. Such high activity levels quarter after quarter simply isn't possible without seamless interaction between our legal, leasing and construction teams. And these results demonstrate we've got an outstanding operations organization. For the second quarter, new DDR saw a 0.6% sequential decline in lease rate compared to March 31, 2018, entirely a result of the rejection of 6 Toys and Babies "R" Us locations and the purchase of the Babies "R" Us lease at Perimeter Pointe in Atlanta for redevelopment. We expect our lease rates trough in the third quarter as the remainder of the Toys boxes moved through the bankruptcy process, although we expect ongoing, robust leasing activity to offset some of these headwinds. While the tenant bankruptcy environment has clearly had an impact on our leased rate, we are successfully backfilling at an impressive pace. Switching gears to capital expenditures. We've commenced a comprehensive $9.4 million LED lighting program that will modernize illumination of parking areas at substantially all of our wholly-owned centers. The program will generate both energy and operational savings, improve visibility for our tenants and improve safety for our patrons. Like redevelopment spending, we believe this investment will provide a measurable economic return, but we will nonetheless include these costs in our maintenance CapEx spending disclosure, inflating our third quarter and fourth quarter 2018 CapEx numbers. Thanks to our property management team for their help, planning and rolling out this initiative, which is a key element in our overall sustainability and property operations strategy. I'm also pleased to announce a partnership we have formed with Waymo that will allow customers to take rides in self-driving vehicles to and from the Ahwatukee Foothills Towne Center in Phoenix. The venture is already helping us to better understand how evolving transportation technology will affect the design and usage of our centers. Finally, on Toys “R” Us. Of the 12 original stores in the consolidated new DDR portfolio, one has been acquired by a new tenant, one has been acquired by DDR and 6 were rejected, with the remaining 4 still paying rent. On the JVs, one of the 5 original locations has been rejected and one has been acquired by a new retailer, with the remainder still paying rent at this time. While we do not yet know timing specifics on the remaining leases, we have assumed for budgeting purposes that all rent will cease within the next month. We have been making significant progress re-leasing these boxes, and I would say that our pace on this bankruptcy has been faster than in the last several liquidations. The overall leasing environment remains generally unchanged from a year ago. Tenant demand is steady and the quality of new DDR's assets is strong enough that our properties remain sought after by the expanding tenants with whom we do business. Additionally, we continue to see strong small-shop leasing volumes and economics, a product of high demand for those spaces and our renewed focus on this inventory in our portfolio. As a result of our efforts, we've seen a 50 basis point increase in new DDR shop lease rate since the first quarter. With that, I'll hand the call over to Matt.

Thanks, Mike. I'll start with some comments on the balance sheet, then touch on some earnings and accounting matters in the quarter and close with some color on guidance before handing the call back for questions. We continue to target pro rata net debt-to-EBITDA of roughly 6x by the end of 2018. But balance sheet risk is about much more than just overall leverage, and we therefore continue to aggressively address our maturity structure. Following our 2017 bond financings and the tender offer associated with the RVI mortgage, New DDR's pro forma average debt maturity of 6.1 years, excluding the RVI mortgage, is now among the highest in the peer group. Pro forma for RVI, we have only $176 million of debt, or less than 10% of our debt outstanding, maturing prior to 2022. Debt-to-EBITDA decreased modestly from last quarter, a product of additional asset sales. Like in the first quarter, our second -- our secured debt ratio this quarter remains elevated because of the $1.3 billion RVI mortgage loan and associated repayment of unsecured debt. We continue to expect all of our bond and leverage metrics to improve in the back half of the year when RVI and its mortgage are no longer included in DDR's financials. We expect our secured debt ratio to be less than 5% by year-end. I'd like to now comment on several earnings and accounting matters. First, included in our transaction activity disclosure this quarter, is an additional $10 million repayment of preferred securities associated with the 2 Blackstone joint ventures. As a reminder, we established a valuation reserve for these securities in the first quarter of 2017, cutting book value by $76 million to $270 million. Since then, we've achieved key sales threshold levels at both joint ventures, allowing us to receive approximately 50% of equity proceeds from asset sales going forward. We recognized 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 Blackstone ventures have just 36 of the 83 original assets remaining as of June 30, with the sales generating total preferred payments -- repayments to us of over $110 million so far. We mark all Blackstone assets to market each quarter, resulting in a $2 million increase in book value this quarter, which follows a variety of small upward and downward marks over the last several quarters. We're making great progress selling assets, reducing our investment in those joint ventures and lowering DDR's leverage as a result. As investors consider our perspective leverage profile, they should consider the gradual receipt of both the outstanding $228 million of Blackstone preferred as well as the $200 million preferred interest DDR retained in RVI. Specifically, we estimate that, were these securities to be repaid in full today, new DDR's debt-to-EBITDA would decline by roughly [half a turn]. Second, on the earnings front, I would like to point out some ongoing noise associated with noncash rents caused by tenant bankruptcies. The write-off of fair market value of rents in Q2, primarily associated with the Toys and Babies "R" Us liquidations, was $3.1 million, causing a $4 million decline from last quarter. Finally, on Puerto Rico, we received and recognized a payment of our business interruption insurance of $3.1 million this quarter, slightly lower than last quarter. The ongoing low level of BI payments represents evidence of tenant reopenings and rent payment as we continue to recover from the hurricane. In the case of this and prior payments, the payment represents only a portion of the ultimate BI compensation new DDR expects to receive on account of revenues lost prior to the spin of RVI. With the return of normalcy to these assets, we expect these payments to remain at lower levels. Our current estimate of total restoration costs, excluding business interruption, remains approximately $150 million, consistent with last quarter. Other than repair costs and BI losses incurred by DDR prior to the spin, insurance payments will generally be retained by RVI. We continue to work with our insurer to reach agreement on a final claim amount and settlement. Operations in Puerto Rico continue to stabilize with a 10 basis point sequential increase in leased rate as well as improved cash receipts. Now a few comments on FFO guidance. First, we are pleased with our same-store NOI performance so far this year and are affirming our assumption of at least 1.5% growth for the year given that we're still only at the halfway mark. As Mike mentioned, our same-store NOI projections assume the rejection of all Toys leases within the next month or so. Given the slower pace of Toys “R” Us lease closings, we now expect same-store NOI to trough in the third quarter versus our prior expectations for the second quarter. We are also maintaining our 3Q OFFO guidance of at least $0.30 per share, which includes $5 million of RVI fees. The expected sequential decline in OFFO from 2Q to 3Q is attributable to the spin of RVI as lost NOI from RVI properties is only partially offset by RVI management fees and lower interest expense. One change from our guidance bridge that we published at NAREIT relates to RVI fees. Specifically, given their transactional nature, we will exclude RVI disposition fees from OFFO and they are, therefore, excluded from our OFFO guidance as well. As we mentioned last quarter, we expected a decline in RVI asset and property management fees resulting from the sale of RVI assets in 2018 should be offset by declines in G&A expense. With that, I'd like to turn the call over to the operator for your questions.

(Operator Instructions) Our first question comes from Christy McElroy with Citi.

Matt, just follow-up on some of your comments on G&A that you just made. I think that your full year G&A guidance was about $70 million. Presumably, that was excluding the separation charges that you incurred in Q2, which are backed out of OFFO. And understanding that there's some movement in that number relating to what's happening with RVI. But maybe you can provide an update there, given that the first half results in prior lower run rate and especially since David, I think in your comments, you made a comment that G&A in the quarter came in a little bit better than expected.

Yes. I mean, on G&A, I would say that our guidance -- you're right, our guidance does not include the kind of the onetime stuff that we exclude from OFFOs with the recurring G&A numbers. You're correct on that. We're retaining that guidance, it did incorporate the changes we made in the staffing and structure recently. So this quarter was a little bit lower. There was a lot of timing differences in there. So it will retain the guidance. I don't think you're going to see a huge change in that.

Okay. And then just for Toys “R” Us, thanks for the slide in there, that's really helpful. Just -- should we assume that the 7 remaining are in Propco and are all ground leases? And just, sort of, in terms of -- from a modeling perspective, it would be helpful. What percentage of your original ABR exposure does that comprise? And maybe you can also give us an update on, of those original 17 in new DDR do you have LOIs out on any of those?

Sure, I'll hand it to Conor. You want to take a shot?

Sure. I think it's fair to assume the number of boxes open essentially are roughly percent of share of our total ABR exposure, which is about 1.5% of ABR. Defer to Matt or Mike on the LOIs.

Christy, this is Mike. Right now, as far as LOIs, for these, I would describe the activity that we're seeing on this Toys “R” Us group of leases to be significantly stronger than what we saw with some of the previous liquidations. And for the most part, we're seeing some level of activity and tenant conversations on the vast majority of them right now.

And the last thing -- sorry, Christy, just they are not all ground leases, to your initial question.

In terms of the 7 remaining, they're not all ground leases?

Correct. It's a mixture.

Our next question comes from Ki Bin Kim with SunTrust.

Can you just talk about the lease spread activity and the CapEx associated to it? Obviously, you guys show a pretty healthy lease spread for new leases, but if I look at the CapEx on disclosure, it looks like you paid about $8.70 per square foot compared to a gross rent of $19, so a net effect rent of $10. I know the stuff can jump around quarter-to-quarter, but any more details you can provide there?

Ki, this is Mike. I think part of the question you just answered. From quarter-to-quarter, you do have a lot of volatility and bumpiness. This particular quarter, probably 2/3 of the leases that we completed were anchor leases, and anchor leases, by nature, are generally going to be considerably more expensive, particularly when you're taking a large space and doing any types of splitting of the space. So I think it's a function more of just this particular quarter and the heavy anchor leasing activity than a fundamental trend.

Just to follow-up. There was one lease in particular this quarter that happened to be more expensive than the others. That happens from time to time. But I would say, as usual, look -- please, please, please, look at the trailing 12-month numbers as opposed to what's happening in any given quarter. We don't -- we're not seeing any change in the economics of what we're negotiating.

Okay. And just going broader, you touched on it, but can you just give us a little sense of how tenant negotiations have evolved over the past year? And things that tenants are asking for and things that you're giving, if that's changed at all?

Honestly, I don't see a huge amount of change in the overall trend of how the leases are structured and the gives and takes. The tenants are aggressive and we're aggressive as well. And for the most part, I think the general structure of the leases has not changed dramatically, with the exception of the fact that we are heavily pushing the shop leasing activity. And I think in the shop leasing realm, we tend to have a very favorable lease result, a little bit shorter terms, lower CapEx and higher rents. But aggregately across the national chain, it's not a huge difference.

Mike, you want to speak to the portfolio overall and how that's changed and potentially changing the leasing dynamics [and easier] portfolio?

Yes, this particular portfolio, now that we pruned it and we really focused on the -- what we consider to be the best real estate, we're finding the leasing effort and the negotiations somewhat stronger in our favor and the fact that most of the tenants are looking at an open to buy that is focused on specific location throughout the country. And locations that we've left in our overall wholly owned portfolio tend to be great locations that tenants are willing to pay good rents for. Their decisions are based on their topline sales estimates and generally they're seeing good topline sales estimates here. So we have a lot of strength in our negotiating power here.

So is the -- how about the time to get a deal done? Has that gotten better?

The time to get a deal done still tends to be -- it tends to be tough. The negotiation process takes a while. But we are finding that the time from the initial conversation to rent commencement has been shortened, but I attribute that less to the lease structure than to our own internal organization and how we're -- we've developed a nice streamlined program here from the leasing team to the construction team to the property management team and the turnover.

Our next question comes from Rich Hill with Morgan Stanley.

I wanted to come back to maybe guidance. And I'm sorry if I missed it in your prepared remarks. But I am recalling what you said, maybe in the last earnings call when you talked about 2Q being the trough for same-store NOI. So I guess, maybe there were some market expectations that you might increase the guide this quarter, and given what looks to be a pretty decent print in the quarter relative to what you put up for the first half, I'm just wondering, is this primarily related to the Toys “R” Us closures not coming in quite as soon as you were expecting, and therefore, you are, sort of, still being conservative in terms of raising the guide?

Yes. Rich, I wouldn't read anything into it. We did -- I did say in my prepared remarks that we now expect the trough to occur in the third quarter. Obviously, we're going to -- per our budget, we're going to have a bigger hit there now just because of those delays that you referred to. There is nothing particularly insidious in our guide. We're only halfway through the year. We're in a dynamic environment, that the headline bankruptcies, as I think many people have commented on, appear to be abating, but that doesn't mean you can't have a bunch of paper cuts in the portfolio that actually do, in sum, add up to a material impact. So there's nothing that we know about. We're just trying to be, I think, careful about that and the fact that fundamentals are still -- it's still a somewhat uncertain environment out there.

Got it. And just one follow-up question. Going back to the net effect of rents. Look, I guess, if I'm looking at the net effect of rents as, sort of, a percentage of your average rent per square foot, I recognize they can be noisy and even if I'm looking at the trailing 12-month numbers, it looks like it's been -- the CapEx has been steadily increasing, and so look, number one, I applaud you for providing you -- providing us that transparency, I wish everyone did it. And there's nothing wrong with saying CapEx is going up. But is CapEx going up or are tenants requiring more CapEx spend? Are you feeling like you have to put more CapEx in? Obviously, new DDR is a growth story and you have vacancies that can be filled. How are we supposed to think about that? And are we supposed to continue to see this sort of trending CapEx going forward?

Yes. Rich, I mean, I'd love to compare notes with you. It is not our view that CapEx, particularly on a per square foot basis, except for the economics, we don't think are changing materially. We've said -- as you know, we've talked a lot about the fact that our mix of leases has changed. We are doing more anchor deals because of the recent bankruptcies we've had that obviously impacts aggregate CapEx. But we have not seen a material change in the economics. We don't think the trend is negative. So I'd love to -- yes, it's probably not something for this call, but maybe offline we can compare notes and hopefully we can reassure you that the numbers really aren't -- not negative the way your analysis is suggesting.

Yes, yes, of course. We can follow-up offline.

Our next question comes from Todd Thomas with KeyBanc Capital Markets.

Just following up first on the same-store NOI growth in the quarter for new DDR. How much did the longer-than-expected Toys “R” Us liquidation contribute in the quarter? And then can you comment on how bad debt's trending versus expectations at this point? And what impact that had on the quarter same-store NOI growth and OFFO results?

Todd, I'll take that one. It's Matt. I would just say, as I said in my prepared remarks, Toys was part of the outperformance versus our own expectations. It was certainly not all of it. I referred to an improvement in bad debt, to your question there. We're definitely seeing -- the cause of it is probably cyclical, who really knows, but bad debt is definitely trending in the right direction. And we also had some faster-than-expected rent commencements at some of the anchors we've expected to open. So it was a mixture of things, but Toys was certainly a very important factor.

Okay. And then, Matt, you mentioned that one of the changes you made, I guess, from the NAREIT presentation that you will be excluding the 1% disposition fee for OFFO going forward. So the RVI fee income that was lowered by $0.04 a share. So about $7.5 million or so. I presume that $0.04 difference isn't entirely disposition fees. What else is changing there? And then, is there anything else in that OFFO bridge worth noting?

Todd, just to clarify on the RVI fees, so essentially it was $0.04 a share of the pickup from the second to the third quarter at NAREIT. We're now saying it's just $0.03. And the difference is entirely attributable to the removal of the disposition fees. So as we guided to at the start of the year, we talked about $10 million of RVI fees in the back half of the year. That's unchanged. And the differences from the NAREIT bridge is entirely attributable to disposition fees.

Does that answer your question?

Yes, I think it does. I have to take a quick look at those 2 and reconciling, get back to you, perhaps. But just one last one then, the -- any additional RVI-related charges that are yet to be incurred by New DDR as of June 30? And if so, how much is that?

Some very small items, but nothing that you're going to notice.

Our next question comes from Samir Khanal with Evercore.

Maybe Matt, can you talk around maybe the potential accounting changes around internal leasing cost that can impact FFO in '19? I just want to make sure -- I mean, it feels like when I look through your supplement, I get the sense that the G&A expense already includes -- you're already expensing some of these line items, is that correct, so there shouldn't be an impact?

I'm going to hand over to our Chief Accounting Officer, Christa Vesy, who has spent more time that she cares to on this topic.

Sure. Samir, you're exactly right. I think as everyone knows, we actually already today expensed the majority of those internal leasing cost, and we are going to factor that into our 2019 guidance, but I would say today we're saying that the impact of the change in the capitalization [rules] should be relatively small.

Okay. And I guess, my second question is, is looking at the recovery ratio, it fell a bit in the quarter and had about -- on my math, about a 50 basis point on NOI growth. From a modeling perspective, how should we think about that ratio, sort of going forward and kind of what's driving that?

Like last quarter, we had some movement in the other direction last quarter. I would just say there is a variety of different things that cause it, it's very granular. Please, I think just look at the trailing 6- or 12-month number on that, especially trailing 12-month number, I think you will see that it's been very, very flat. So I would just kind of use that number as your go-forward.

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

So just a few questions quick. Matt, on the Blackstone JV, you said there was a positive $2 million revaluation. So one, was that in FFO? And then second, you mentioned about a 6.5% sort of earnings yield. So just curious if you could provide the balance, if that's what we should be modeling as far as in income level or if the 6.5% yield that you cited was in reference to something other than a P&L impact?

Yes. So the evaluation would not be in our OFFO that we reported. So that's not part of it. The 6.5% is -- relates to the balance of our preferred, right? That's really -- we're only a 5% owner in these assets. So that 5% number could move a little bit depending on prices that are sold, but the preferred piece is really the basis for your 6.5%. There's a 6.5% cash coupon that we are paid by Blackstone -- by the joint venture, I should say, on our balance. So that number is flat. That's not really -- the balance will change to some degree based on market pricing, but your 6.5% on the book value we got today is your best number for using your modeling going forward. There is also -- I should remind you, there is an additional 2% that we received that's a payment in kind, which we are no longer recognizing in our GAAP net income, but that number is there and that will change the value of our preferred on the margin over time as well.

Okay. And then on Toys. So you guys are saying it goes away in third quarter '18. So the full impact if we go from sort of 2Q to 4Q, the total impact on a per earnings basis from Toys going away until obviously that space gets backfilled. How would you quantify that? Is that like a penny of earnings, 2 pennies? Or how should we think about that?

Yes. I mean, we haven't boiled it down to specific FFO guidance. I think our view is that you can look at, we provided a table on our slides that give you a very good feel for how much has closed, use kind of -- calculate a pro rata number based on that and you're not going to be far off.

The other thing I would add, Alex, as Mike alluded to, we've had some pretty substantial leasing activity over the last 6 to 9 months and so you'll see some offsets now in both the small shop and the anchor side.

Okay. And then just a final question is for David. David, you're through the RVI, so that's behind. But you also talked about a desire to delever further while obviously there's CapEx, there's re-tenanting, better redevelopment that you guys want to do. In your view, in your philosophy, do you think that -- is your focus more that DDR should grow every year? So, let's say, there is a commitment to grow DDR FFO 6% a year and that's what's going to be the driver and the other elements, whether it's deleveraging or CapEx, et cetera, will be modeled around that or is that not the focus? And the reason I ask is, obviously, prior to you guys there, DDR for a long time had flatlined FFO just as it was trying to improve the balance sheet and recycle and get better assets, But FFO [kept --] sort of went nowhere. So just sort of curious, now that you're beyond RVI, what should we expect as far as earnings growth and where that stands on the priority list?

Right. Alex, it's a great question. And it's certainly something we talk about quite a bit here. I will say that by the time we get to the Investor Day conference, we'll have a more robust discussion and some graphics that will help you all understand how you should think about our strategy going forward. I think for this kind of time period, a couple of weeks after RVI started trading and a couple of months before our Investor Day conference, we're really just focused on the stability and the safety of a company with great assets. And I do think that our EBITDA will grow. And I think our leverage targets are very reasonable. There's certainly nothing wrong with lower leverage. But for right now, I think we're heavily focused on recycling. We're looking at external opportunities, but we really haven't laid out long-term targets for the volume of those opportunities, primarily because they're opportunistic.

Our next question comes from Haendel St. Juste with Mizuho.

Couple of quick ones from me. First, I guess, the question on tenant retention, which looks like it's been at or near all-time highs of late, about 90% on the same-store, 75% on the total pool. I guess I'm curious what your -- what do you think of the retention levels here? And how do you think about retention perhaps drifting lower, or do you think about retention drifting lower over the next couple of years?

Well, right now, I think we've got a pretty stable portfolio in good markets where the tenants are performing well. So that is helping drive the retention level maintenance. And I think, in general, there is a lot of times where you see some rise and some fall in some of the shop tenants, but generally I don't see any trend other than that we've got good real estate. And as a result, I think the retention should maintain a pretty high level.

Okay. And then on the dispositions during the second quarter, I'm curious, just for some incremental color, were there any portfolio buyers that you noticed a change in perhaps the composition, the overall demand, any change in the financing? I understand that the financing has been there, any incremental perhaps change on that front?

We really haven't. Each -- I mean, we sold so many assets in the last 1.5 year and I would say that everyone is an individual decision. I mean, the thing I think you have to remember when looking at our supplemental is that it's tempting to want to make macro assumptions about trends. And the reality is we have 78 assets now, and those 78 assets have spaces that are at specific intersections and specific townships. And our leasing staff and our redevelopment staff focus on each individual property. It's very hard with a portfolio this concentrated in high-income markets with only 78 properties to make kind of sweeping assumptions. I think that's kind of the one key point that we'll be dealing with probably for a year or so until folks get used to the fact that our portfolio is much more concentrated.

And just to clarify and one more. The pool of buyers, were there any portfolio buyers? Or were these primarily one-offs? Or any sales of any bulk?

They're all one-off.

Our next question comes from Brian Hawthorne with RBC Capital Markets.

When you guys think about funding future investments, do you look at kind of raising the capital from dispositions? Do you have to sell anymore consolidated assets or would selling the -- some of these unconsolidated joint ventures be enough?

Everything is on the table. It really comes down to what's the opportunity at the time and do we think our shareholders are going to get better value from recycling unconsolidated versus consolidated.

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

I have one more question on kind of leasing and retaining CapEx. How much does the kind of total CapEx cost per square foot vary if you are backfilling, let's say, a Toys “R” Us box with a single tenant or if you have to divide the box and cut it into [you play] 2 or 3 spaces? What's the kind of cost per square foot difference for those back drawing options?

This is Mike. Generally, if you're taking a single tenant and putting in the space versus splitting it into 2, you're going to probably see about a 25% increase in the total CapEx necessary to fill that space.

Is there any kind of rule of thumb numbers you can provide on, let's say, a 40,000 square foot box in terms of expected landlord work, [CIs] type stuff?

It completely depends on the tenant that you're looking at. The difference is really focused on the [demising] of the space, splitting the utilities to store fronts and things like that.

Again, it's really -- I know it would be wonderful to kind of figure out on average what are the differences. I think you can look at individual deals, but the fact of the matter, the type of the building, the age, the column structure, how much power is on the site, do you have enough clearance, is there are mezzanine? You can go on and on and on and the difference between splitting boxes in Boston versus Kansas is a big labor difference. So it's very hard for us to make kind of sweeping averages on cost. I think as we look at them, we're simply looking at our return, and so the rents are different in those markets as well. And depending on whether we're splitting a box or putting a single tenant in, it really comes down to how much value we think we are creating for the shareholders.

No, it makes sense. It's helpful color. My next one is just really overall industry, how do you think the backfilling of Toys is going differ from the backfilling of Sports Authority? Are you seeing kind of new tenants emerge or different merchandise categories? Or is it kind of the similar kind of class of tenants we've seen over the past few years? And then just anymore color you could share on kind of the need or desire to split spaces versus finding single-tenant backfills? Do you think -- any really noticeable trends on those fronts that are different than Sports Authority in your opinion?

Right. Well, first of all, the level of interest is higher. As far as who is interested, right now, across our portfolio, and much of this is for backfilling Toys “R” Us spaces, but it also applies to virtually any junior box space we're looking at. We're actively negotiating deals right now with at least 20 major national healthy companies, ranging from the off-price guys like Burlington, Ross, the TJX brands all the way over to specialty grocers like Lucky's, Sprouts. We're doing -- having conversations with Publix, Kroger, Whole Foods, Total Wine, I mean the list is pretty extensive. And all of those are going to be potential candidates and all of those are healthy companies that are growing right now.

Do you want to comment on the splitting dynamics and the market?

Yes. Generally, when it comes down to a decision as to whether we're going to split a space or do a single tenant use, it really comes down to what's going to be the best for that particular center and where we think we're going to get the best economic return. If a tenant is interested in the space and their rent isn't particularly attractive versus if there's 2 tenants interested in the space and the rent is significantly better and the return is better in spite of possibly more CapEx, we're going to choose the latter. And it comes down to a financial decision on the returns of every deal.

And I would say on the margin, it's still very early days, Vince, but I would say that it sounds -- from the feedback Mike has been giving us, it sounds like there may be some -- there may be fewer splits here than we originally feared, not ready to kind of our hang our hat on anything yet, but the initial evidence is, I would say, enough to make us cautiously optimistic.

Definitely fair to say that we're going to see fewer splits as part of the Toys than what we saw. Part of that is because Babies "R" Us is a smaller space. You don't need to split them.

That's interesting. One last quick one, if you don’t mind. If you had to quantify the same-store NOI impact of Toys “R” Us between '19 and '20 -- or sorry, '18 and '19, kind of like do you see the impact now actually being more on '19 than '18 given the drawn out process?

It's not clear yet, to be honest with you. I mean, you can see the timing, right? I think maybe on the margin you get a little more in '19, depending on exactly how this all plays out, but I think it's still too early to really know the answer to that question. I mean, the good news is that a quarter from now, we will know the answer, right, in all likelihood.

Our next question comes from Collin Mings with Raymond James.

Just going back to your comments on shop leasing. A few quarters ago, you outlined kind of a pre-spend $40 million NOI opportunity associated with leasing up some shop space. Just curious if you think about new DDR and obviously you highlighted and a lot of comments as far as some of the leasing momentum. Just how would you characterize that small shop opportunity going forward?

As far as the overall opportunity going forward with shops, it really comes down -- the way we focus on it is strictly looking at it from an opportunistic standpoint as to where we can drive rents and drive occupancy with shop leasing. Overall, the growth potential in shops is still a significant number and we'd have to tally that and get back to you where think we're at now. But ultimately, we think we're striving for being in the low- to mid-90% occupancy rate.

Okay. And then just maybe pinpoint that out to NOI -- overall NOI opportunity there might be something kind of for the Investor Day that you guys may be able to provide?

Yes, exactly. We haven't spelled that out. Again, we probably should have, but we haven't done that. Obviously, in absolute dollar terms, it has to be smaller, but I think relative to the size of the portfolio, I think you will actually find potentially a bigger opportunity. So we will have to -- we will quantify that better for you.

There is no question after the spin-off with the portfolio we have today. If you think of the drivers of small shop occupancy. If you're in wealthier markets, there's more discretionary income and those people can afford a wider variety of shops, right, serving their communities. If the anchor tenants are driving high sales, it means they have high traffic, which means you're more likely to drive more shop demand. And the more shops you lease, the fewer vacancies are available, which means that the demand is for a scarcer amount of inventory. So I think we feel like curating this portfolio gives us a little bit of fuel to feel confident that we're getting a lot of traction on the shop leasing.

Okay. Got you. Just kind of a self-reinforcing cycle there of leasing activity.

Yes. As long as economic forces -- macroeconomic forces are positive, which they are, but as you all know, shop occupancy is much more correlated to GDP and employment rate than boxes are.

Good point, good point. And then just going back to -- you guys referenced it in the prepared remarks and there's been a couple of questions already on it, but just maybe trying to put a little bit finer point on the comments that you guys have gone back to, just saying that Toys is going better than prior liquidations and -- in the prior question you kind of commented on maybe having to divide up the boxes left, some of that being a box-size component to some degree. But just bottom line, what do you think is really driving better demand this time around prior -- relative to prior liquidations?

Again, it's -- the quality of the portfolio is better. The centers that we're attracting tenants to for the vacant Toys spaces is aggregately a better portfolio and has greater demand from the tenants than the prior situation.

Our next question comes from Craig Schmidt with Bank of America.

What are the plans for the dividend at new DDR, now that you've been through the spin-out?

It's a great question, Craig. As you can imagine, as our Board thought about, the proposal from management to execute a spin, one of the large conversations was around dividend. And as you know, the dividend policy is squarely in the decision-making authority of the Board of Directors. I think what we have said on previous calls is that management has made a recommendation, but the Board's vote on that dividend is not for a little bit.

I mean, is there anything that the lease management would like to get in terms of a spread between FFO and the payout for more cash to reinvest?

Craig, we've been -- I've been -- I would just reiterate what we said before on this, which is [I’ll put it in] adjusted basis is at least $0.20 a share. So you can kind of do your math from there. We did solve for materially -- materially lower AFFO payout ratio and that's the recommendation that we intend to make to the Board.

Our next question is from Mike Mueller with JPMorgan.

My questions were answered. I tried to jump out of the queue.

(Operator Instructions) Our next question is a follow-up from Christy McElroy with Citi.

It's Michael Bilerman here with Christy. just had a few questions. Just in terms of Investor Day, and thank you for moving it off of the Jewish holidays to October. I guess, are you planning at all -- I know you want to focus on your strategic priorities, the portfolio redevelopment opportunities, honing in on the 78 assets that you're doing. I guess, are you going to plan on doing a forward, sort of, 3-year financial plan in terms of cash flow FFO and sort of projected NAV growth in that context?

I think that our goal is to make sure that the investment community is able to think clearly about what our future looks like. And so the components of that will certainly be laid out over a multiyear period. The variable, of course, is external growth in investment dollars, which is more difficult. But I certainly think we can make a pretty credible case. We've had enough time to dig into the details of every single asset and with 78 wholly-owned assets making up 90% of our NOI, it means that we've got an awful lot of clarity as to -- our opinion as to what the next few years look like.

So we will get the components, but not necessarily per share estimates of a 3-year plan?

I don't want to front run things, Michael. You've seen -- you saw what we did at Equity One, it's not the first time we're trying to put together a multiyear plan. We need to -- this isn't just about some pretty slides and a nice show, this is about helping you and our investors walk away with a very clear idea of what to expect from DDR's economics going forward, right? If we get to the point where we -- there are some things we'll definitely deliver on a per share basis, some things we will not. We're still formulating everything, but I feel confident that you will walk away feeling like you understand what the cash flow profile of this company will be for the next x years.

And outside of the management team, I guess, how will the Board and specifically Auto be involved in the Investor Day?

Well, the board members are generally enthusiastically asked to attend and act as board members, which is, they're not making presentations. I certainly wouldn't expect that any individual board member would be speaking about his or her shareholdings. It's a management presentation about what management believes the strategy is going to result in after having worked with the board for last 1.5 years.

But you would expect -- if you were in our chair, you would absolutely preview this sort of thing with the Board. You wouldn't go out there and present things that the Board was hearing about for the first time, and explicitly didn't bless, right? So if you're asking about Board interaction ahead of time, you would be right to expect that we wouldn't be out there was something that, that we thought we viewed as highly disagreeable.

Right, I just wasn't sure whether you will be providing the opportunity for analysts and investors to interact and ask questions to the Board, especially as you get new members on, not sure where that process stands today and if you can provide an update, that would be great. But just sort of those interactions, I think given the history and given the changes certainly would be helpful from an interaction perspective. So I don't know if, David, you want to provide a little bit of color of where stand right now with further changes to the Board and additions and things like that?

Sure. There's been a committee that is working under the nominating and corporate governance chair. We have been actively engaged in interviewing candidates for Board seats. We have gone through skills that each person on the Board has had a chance to opine about what they think is a great skill set going forward given what this company looks like. And so far, I feel inspired by the number of candidates and the interest and the kind of diversity and the breadth of knowledge that we could bring onto our Board. It would be very helpful. So I think the whole board is a little bit energized about the prospect of some fresh blood. Having said that, going back to your original question, the Investor Day is a management presentation. And so I think if there is a desire to have contact with certain directors, I don't believe that the Investor Day is one that we would promote as also being a Board interaction.

Okay. No, that's unfortunate because I think there's certainly an opportunity to have that especially if they're traveling in for it, especially from Germany. Just 2 other quick questions. The $190 million preferred that you're going to hold at RVI, I mean, how are you going to treat that from a balance sheet perspective? I don't know if you're just going to mark that at book value or if there's some other valuation methodology we should be thinking about?

No, it's very strict, [always cost] basis. So there's no funny business there.

So just $190 million will be on the balance sheet?

Correct.

And then lastly, just on the Waymo venture with the Walmart centers in Phoenix. Can you give a little bit more color how that came about? Was it your Walmart relationship? Was it some outreach that you had with Waymo. How did your involvement come about relative to other potential landlords in Phoenix?

We're not involved with Walmart. It's basically just 2 separate relationships. There is a Waymo-Walmart relationship and then there's a Waymo-DDR relationship. Waymo effectively was -- is based in Chandler, Arizona in Ahwatukee Foothills shopping centers there. And our SVP of IT has a relationship with Google, and ultimately was able to set up a -- build a relationship with Waymo and we were able to strike this arrangement.

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 look forward to next quarter.

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