SITE Centers Corp. (SITC) Q1 2015 Earnings Report, Transcript and Summary

Good day and welcome to the DDR Corp First Quarter 2015 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Meghan Finneran, Senior Financial Analyst. Please go ahead.

Thank you. Good morning and thank you for joining us. On today’s call, you will hear from President and CEO, David Oakes; CFO and Treasurer, Luke Petherbridge; and Senior Executive Vice President of Leasing and Development, Paul Freddo. Please be aware that certain of our statements today maybe forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and actual results may differ materially from the forward-looking statements. Additional information about such risks and uncertainties that could cause actual results to differ maybe found in the press release issued yesterday and the documents that we file with the SEC, including our Form 10-K for the year ended December 31, 2014 as amended. In addition, we will be discussing non-GAAP financial measures on today’s call, including FFO and operating FFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release issued yesterday. This release and our quarterly financial supplement are available on our website at www.ddr.com. Last, we will be observing a one question limit during the Q&A portion of our call in order to give everyone the opportunity to participate. If you have additional questions, please rejoin the queue. At this time, it is my pleasure to introduce our President and Chief Executive Officer, David Oakes.

Thank you, Meghan. Good morning and thank you for joining us. I would like to start off by discussing the focus of this management team, the progress made in the first quarter, and the implications that this refined focus had on operating results for the quarter. As we have conveyed the investment community over the past two months, we are acutely focused on long-term net asset value creation for our shareholders and we are committed to building a portfolio of Fortress power centers, which combined with a low risk balance sheet and more simplified story and a talented team that we are refining should translate into outperformance in both full and bear markets. We have made good progress on those fronts in recent months that you will hear about throughout this call. First, we are accelerating disposition of our non-prime and prime minus assets beyond our original guidance of $250 million given the current pricing environment. While these buckets continue to diminish in terms of overall value, we think it is prudent to expedite the sale of these assets at historically strong prices for our property type as evidenced by large portfolio trade that was recently announced in our sector. Very simply, we only seek to own assets, which sit on high-quality dirt with attractive growth profiles. And those shopping centers that do not meet these criteria will be disposed of. That increased focus on the quality of the dirt and our strict underwriting standards have made the acquisition environment difficult, although we remain confident in our ability to source unique high-quality acquisitions at attractive prices. Longer term, we envisioned that the overall asset count of the company will continue to decline although we would expect our total portfolio value to be higher as we find larger scale acquisitions in redevelopment and wish to invest in the coming years. Second, we are reducing risk and creating more simplified company and remain paramount to our story. Our progress continued this quarter with the issuance of additional long-term unsecured debt and restructuring of our lines of credit in term loan. All of which extended our weighted average duration and reduced DDR’s cost of capital on which Luke will elaborate. Also during the quarter, we wound down the Coventry joint venture, which removed the overhang of legacy $500 million lawsuit and allowed DDR to effectively dispose of 22 low-quality joint venture assets and gain 100% ownership of a high-quality center in Southern California. Third, our organization continues to improve and heighten its focus on excellence and execution, long-term planning, operational efficiency and collaboration. These characteristics drove some of the activity that you saw in the first quarter and should have a much greater impact over time driving consistent long-term value creation even at the expense of some short-term noise. We are confident that our shareholders will see the fruits of these changes in the coming quarters. Finally, I would like to spend a moment on a specific example how this long-term focus can create short-term noise. Our decision to reduce our expected holding period on 25 operating shopping centers and the majority of our remaining land parcels that drove the requirement for the impairment charge as a result of our desire to more quickly reduce our exposure to weaker assets, while we acknowledge the historic investment missteps, the current team is committed to rapidly moving forward in an effort to create that fortress power center portfolio and report a cleaner earnings figure in future quarters. Additionally, our commentary regarding increased asset sales could indicate near-term earnings headwinds. However, our team believes that this is outweighed by the long-term benefit to shareholders as evidenced by the outperformance over time of those the blue-chip REITs who are similarly focused on capital allocation over the course of multiple cycles. I will now turn the call over Paul.

Thanks David. Operating fundamentals remain strong in the first quarter as evidenced by the continued strength in deal volume and spreads. We executed 289 new deals and renewals for 2.6 million square feet, in line with historic volume and resulting in a leased rate increase of 40 basis points year-over-year. For the quarter, we achieved a positive pro-rata new deal spread of 26.9%. Our highest pro-rata spread since we began tracking this metric. We also achieved a positive pro-rata renewal spread of 6.7%, resulting in a combined pro-rata spread of 9.7%. In regard to the renewal volume and spread, as you know these metrics will vary quarter-to-quarter based on the pool of leases that are being renewed in any given quarter. As an example in this first quarter, we had several large anchor tenants exercising options at lower single-digit spreads. If these anchoring renewals were excluded, our renewal spread would increase by 120 basis points to 7.9% on a pro-rata basis. Also worth noting 95% of all tenants with the opportunity to exercise an option did so in this quarter, well above the typical rate. This retention is a direct result of the improvements in the portfolio and the lack of downtime and capital required more than offsets the lower spread on an economic basis. Our overall leased rate declined by 20 basis points sequentially and increase by 40 basis points year-over-year to 95.5%. As I have previously mentioned a slight decline in the first quarter was the historical norm. In addition to the typical seasonality of move-ins to move-outs, this quarter’s decline also reflects the impact of the RadioShack bankruptcy and Project Accelerate as we continue to position our assets for long-term growth. The RadioShack bankruptcy alone accounted for 40 basis points of the 50 basis point decline in the leased rate per space less than 5,000 square feet. Given our pipeline of new deals, we remain confident in our guidance to increase leased rate by 25 basis points to 50 basis points by year end 2015. It is also important to remember that we view the bankruptcy of retailers such as RadioShack or Deb Shops in a very positive way. We have been anticipating getting this space back for some time and are excited about – by the opportunities these situations offer given the current leasing environment. First and foremost, gaining control of the quality small shop space that tenants like RadioShack occupies within our shopping centers allows us to re-merchandise our space and accommodate higher quality and better credit tenants. In many cases the simple backfilling of space results in an attractive rent comp ranging from the high single-digits to the mid-40% range. In other cases we are working with new or existing tenants to consolidate small shop space allowing tenants to get right sized or creating an opportunity to add a desirable retailer where we previously did not have enough space to accommodate them. So while for one example, at an 800,000 square foot wholly-owned prime plus power center in New Jersey, we proactively retained control of the RadioShack lease in the bankruptcy proceedings. This allowed us to control the real estate and consolidate RadioShack space with an adjacent small shop unit that was chronically vacant to accommodating a power retailer. We achieved the rent comp of over 33% and a return on invested capital of over 30%. Based on the deals which are already negotiated where we were simply waiting for leases to be rejected as well as initial expressions of interest, we are confident the re-tenanting of the RadioShack space will produce improved merchandise mix at higher rents and with limited down time. The simple nature of retail is that we will continue to see winning and losing retailers. We have consistently welcomed and proactively pursued the recapture of space occupied by retailers and declined. These situations provide us with a breadth of operational advantages and value creation opportunities. We continue to build relationships and execute deals with best-in-class market share winning retailers and we analyze all opportunities in great detail to ensure we are making quality deals that enhance the merchandise mix and economic value of our assets and create long-term value for our shareholders. I would now like to take a few moments to update you on our current development activity. As you know, we opened Seabrook Commons last summer. Seabrook Commons is a 380,000 square foot prime power center located north of Boston and includes Wal-Mart, Dick’s Sporting Goods, PetSmart, Michael’s, ULTA, Famous Footwear and Five Below as well as the complementary restaurant lineup consisting of Panera, Outback Steakhouse and Noodles & Company. Home Goods will soon be added to this strong lineup as they are slated to open this fall. Following on the success we are experiencing with Seabrook, we continue to make great progress on both Guilford Commons located just East of New Haven, Connecticut and Lee Vista Promenade located in Orlando, Florida. We broke ground on Guilford Commons last fall and the center is on track to open during the fourth quarter of this year. Guilford Commons will span 130,000 square feet and include best-in-class retailers, such as the Fresh Market, Bed Bath & Beyond, Michael’s and DSW as well as 40,000 square feet of shop and specialty space. We will be 85% leased at opening and expect to be fully leased in the first quarter of 2016. We also broke ground on Lee Vista Promenade in December and are on target to open the first phase of this center in the fourth quarter. Lee Vista Promenade will be a 450,000 square foot multi-phase project located in a heavily traffic area just north of the Orlando Airport. The center will initially be anchored by a theater and a great lineup of junior anchors and restaurants, including Home Goods, PECO, Five Below, Famous Footwear and others. In closing, as you know, RECON is just around the corner. As we head into this year’s show, our focus continues to be on the consistent qualitative and quantitative improvement of our assets. The leasing environment continues to be strong and we intend to take full advantage of this opportunity. As usual, we will have a full slate of meetings scheduled and look forward to having productive meetings with our retail partners as well as members of the investment community. And I want to remind everyone that we will be located at the Villagio again this year. And please keep in mind that our space will be open on Sunday as well as Monday and Tuesday. We look forward to seeing you there. And I will now turn the call over to Luke.

Thanks, Paul. Before I review our first quarter financial results, I would like to take a moment to express my gratitude to both David and the board for the opportunity to lead the financial and transactional arms of our company. I look forward to continuing to work closely with our talented and experienced team, our bankers, our partners and the investment community in my expanded role. I am excited about the direction of the company and our ability to generate above average long-term returns for our shareholders as we continue to strive to become a blue-chip organization. In conjunction with David, I will oversee two primary goals in order to position us for long period of our performance. First, to operate our business with the appropriate level of risk and second, to expedite our portfolio transformation, which is already seen over $2 billion of more than 250 lower quality assets sold in the past 5 years. Our first quarter activity is evidence of continued execution on these goals. Turning to the results, for the first quarter, operating FFO was $107.1 million, or approximately $0.30 per share. Including non-operating items, FFO for the quarter was $13.2 million, or $0.04 a share. Non-operating items primarily consisted of $279 million of non-cash impairment charges. In light of the attractive cap rate environment combined with the transition in leadership, this management team will further seek to accelerate our portfolio repositioning. And as such, we felt it is now prudent to review the basis of the assets we don’t deem to be long-term holds. This review has resulted in us booking in the first quarter, an impairment of $279 million, which includes $190 million of operating assets and $99 million of land. We wrote down five of our final six tracks of land and intend to market and dispose of these at figures close to the current basis. These actions support our message that we will operate with fewer non-income producing and non-prime assets and we will continue to utilize the markets low cap rate environment to our advantage. We expect any quarterly deltas between FFO and operating FFO going forward to be truly non-recurring. This decision was the first of many that this new team will make as we look to expedite the final stages of the transformation and report a clean and transparent earnings figure in future quarters. I would now like to begin my summary of the quarterly’s transaction activity by discussing the wind down of our legacy joint venture with Coventry. At the time of its dissolution, the joint venture managed 22 assets in an 80-20 partnership between Coventry Real Estate Advisors and DDR. As we had no GAAP interest in 18 of the 22 assets, the financial impact of the venture was minimal on a company wide scale. However, exiting Coventry mark a successful resolution of a significant lousily [ph] which the company successfully defended and it further exemplifies our goal of exiting smaller joint ventures which would no longer consist over the company’s business strategy in favor of longer term partnerships with large sophisticated institutional partners that would better align with the company’s current investment objectives. In exchange for our $0.20 interest in 21 of the portfolio’s 22 assets, we acquired from Coventry’s $0.80 interest in Buena Park Place, a 220,000 square foot prime portfolio of prime located in Orange County, California. As overall pricing continues to favor to sellers Buena Park Place has been our only acquisition year-to-date. Notwithstanding the environment, we remain confident reaching our acquisition goal for $250 million predominantly in the latter half of the year. During the quarter we disposed – obtained assets there by the Coventry joint venture, totaling $104 million of the company’s share and had seven additional assets under contract as are at quarter end totaling $80 million. And we expect that amount to grow – under contract to grow as we look to opportunistically dispose of assets at attractive pricing. Should this trend continue, we expect our disposition activity to exceed our acquisition activity in the first half of 2015. As announced last week, we closed on amendments to two revolving credit facilities and a new unsecured term loan. Pricing on both revolvers was reduced by 15 basis points and is set at LIBOR plus 100 basis points. While final maturity was extended from April ’18 to June 2020. In turn with this refinancing we entered into a new $400 million unsecured term loan, which is priced at LIBOR plus 110 basis points and has the final maturity of April 2020 and it’s currently undrawn. We anticipate we will draw on these in the latter half of the year with pricing used to address almost half of our 2015 debt maturities. And at the same time enable us to continue to grow our encumbered pool and quality with the addition of four franchise assets including Shoppers World in Boston. As we continue to operate the business with less risk, our leverage metrics will continue to reduce over time, but not at the detrimental value creation. This quarter was the last quarter that debt to EBITDA will be negatively affected from the prior corresponding period due to the sale of our Brazilian investment. This divestiture as explained in mid-2014 was the right long-term decision for the company allowing the reduction of our exposure to development, foreign currency and non-controlling investment risk albeit at the shorter term expense of debt to EBITDA reduction. Before I turn the call back to David I would like to address several modeling related events that occurred in the first quarter. As mentioned on February’s call the snowfall that hit New England at the beginning of the year impacted our first quarter recoveries. We incurred $1 dollars of non-recoverable weather-related expenses in January and February alone, nearly twice as much as we expected which closed the same store to deteriorate more than 25 basis points. Separately, temporary legislation in Puerto Rico has allowed us to opportunistically reduce our perspective tax rate on the island from 39% to 10% while restructuring the ownership of our assets into a REIT. When we originally acquired our portfolio in the island shopping centers were not a property eligible for tax treatment under Puerto Rico tax rule. Since the Puerto Rican rate structure was not about what the time and based on what’s held in a vehicle which is subject to the highest marginal corporate tax rate of 39% for operational activity and capital transactions were subject to 29% taxes. So with short-term we are latest initiative and the company’s productive discussions with taxing authorities we were able to opportunistically restructure the ownership of our investment into a group. Perspective tax rates with this new ownership structure will now be 10% for both operational and capital gains generating activities representing a tax benefit of 29% on all of our future operations on the island. In order to accomplish this restructuring, the company elected to pay an upfront tax priced upon a reduced tax rate of 12% on unsheltered tax or capital gains from its Puerto Rican assets. The time will also allow our tax rate to increase, which will generate future tax reductions. For reporting purposes, the tax payment of $20.2 million results in the creation of a tax asset of $16.8 million and non-recurring $3.4 million tax expense that has been added back to operating FFO. The investment is anticipated to generate double-digit returns in the form of savings from lower tax rate achieved in this transaction and represents another example of long-term focus of this management team. As a final note, we have updated and expanded the disclosure of our development and redevelopment activity in our quarterly financial supplement. We are breaking at all major redevelopments with over $10 million of total spend. We are finding all minor redevelopments under $10 million of spend and delineating further between re-leasing, which is included in same-store NOI and redevelopment, which is excluded from same-store NOI. The new content is streamlined in an effort to clarify modeling of our development pipeline and we hope that this expanded disclosure is helpful to the investment community. We have additionally included a summary of our top 50 assets by ABR in an effort to showcase the size, scale and quality of our largest assets and allow the investment community, to more closely monitor the properties that makeup approximately 50% of our value. I will now turn back the call to David for closing remarks.

Thanks, Luke. Further, we have referenced the earnings headwinds from higher volume of asset sales we remain comfortable with reiterating our original 2015 earnings guidance of $1.20 to $1.25 per share of operating FFO. What we do expect to dispose of more than the $250 million of original disposition guidance throughout the year, we are not altering our earnings guidance range as the range contemplates increased sales and we continue to find other areas where we can beat our budget. Operating fundamentals remains strong and we expect no change to our original same-store NOI or leased rate expectations. Thank you for your time and I will now ask the operator to open the call up for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Christy McElroy of Citi. Please go ahead.

Good morning. This is Katie [indiscernible] on for Christy. Just a couple of questions on the targeted asset sales, do you plan on exiting any markets entirely or will it be more asset-specific? And then could you provide any additional color around the timing of expected dispositions in acquisitions throughout the year?

Yes, Katie, this is Luke. You are not going to be specific to markets I think it’s an asset by asset basis. We are looking to reduce our exposure to assets that we deem as prime minus or non-prime, so ones that may have lower growth, but do seem good markets, you will start to find that the assets we are selling will be larger in size and probably attract better cap rates. So, they are becoming more and more institutional. It’s just ones we don’t see more medium to long-term. We are able to drive the growth that we are after.

The next question comes from George Auerbach of Credit Suisse. Please go ahead.

I guess the $180 million write-down suggests a pretty large group of assets that you are going to sell in the near-term or looking to sell in the next 12 or 24 months, can you quantify for us what the amount of assets are that you have either on the market today or expect to put on the market soon? And I guess when you ran through the math on the write-downs, what was the assumed cap rate you were assuming on the sale of these assets?

Yes, sure George. So, right now, we have – as we outlined, we had closed on the company’s share about $150 million at quarter end, that’s increased closer to $200 million and we are probably with what’s on the contract closer to $250 million today. What’s probably worth noting is the assets that we have impaired down? They will be – they will likely be sold over the medium-term not immediately. So what I think this should be saying is something that we are going to exit in next six months, but over the next 12 months to 24 months these are the assets that we are looking to exit. From a cap rate point of view, the cap rates of these assets are probably in the 7.5 to 8 cap range. They are smaller assets. They have a general household income and population that at 20% to 30% lower than our prime average so digested [ph] in weaker demographics and the NOI CAGR on these assets are less than 1%. So assets that we feel we can write a capital add off and into much stronger better performing assets over the longer term.

The next question comes from Jeff Spector of Bank of America. Please go ahead.

Good morning. Thank you. My question is back on the strategy David you in your opening remarks specifically used the word quality dirt, fortress power centers, can you define that a little bit more I mean we continue to hear more about hybrid centers, but again you are using very specific words on the strategy?

I think there are two way to approach it Jeff. And one of those is from a purely qualitative perspective where it is challenging to provide an exact definition there. I think from the experience of the large team that we have here working on this some of that comes down to just having seen thousands of shopping centers around this company – country being familiar with markets and submarkets and saying this is the location that makes sense, that has opportunity to improve over time, it’s fantastic amount of feedback that we get from retailers in terms of their current performance or their future growth plans that we take into account through the dialogue with a large number of retailers on a regular basis. So I think there is some of it where I can’t offer you any sort of specific definition that would define exactly what we mean except for we know when we see it when we go through a very large number of assets. The other side of it that I think we have made great strides over the past couple of years to quantify and to be able to offer a more clear definition is through our portfolio management efforts where we really have come up with three primary criteria on which we grade every asset in terms of what we think of the locational or dirt quality, how the tenants perform today and the credit quality of those tenants and then the value creation opportunities that we see over time. So those three buckets divided up into several sub-buckets where we do give each asset a specific numerical grade that they comes down to define our prime plus prime and prime minus in and non-prime buckets. And so while we don’t share them publicly, we do have a detailed analysis for each asset that really defines for us what we think of is a prime plus center or a fortress center as we mentioned earlier. And so on various property tours and other events we have showed off this analysis a little bit I think we will be talking about it more obviously something proprietary so not anything that we will be publishing. But I think a tool that’s been very helpful internally and looking at our portfolio and looking at external opportunities to provide at least a more quantifiable and numeric answer to your question of how we define quality in terms of either prime slots or fortress quality assets where we are – we have made great strides in moving the portfolio in that direction and we expect to make considerable progress as we look out over the next several years.

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

Yes. Hi, this is Grant Keeney on for Todd. I was just wondering David there is an uptick in M&A activity and I am just curious what your view was on M&A in the space and what role DDR may play if any?

We are obviously watching it very carefully. We do a considerable amount of work on any portfolio public or private that contains shopping centers where we would have any interest in owning it. We obviously have a great relationship with Blackstone where we have worked on a number of deals together that you have heard about because they happened and we worked on a very significant number of deals that you haven’t heard about, because they haven’t happened or haven’t happened with our involvement. And so I think we have got a good seat and a huge amount of research done internally to view those transactions and find the rare situation in a portfolio deal like with the ARCP portfolio last year where we thought it was a portfolio of size and a portfolio with extraordinary quality among the top assets, but also one that because of the situation the seller found themselves in where we were able to execute at very attractive pricing. And so in terms of checking both the boxes, quality and pricing, I think that was one that fit the bill for us as we have looked at other recent transactions we haven’t seen that it’s met both or even either of those criteria in some cases. And so I think we have got the underwriting capacity, we have got the information, we have got the operating platform that would allow us and now we also have the balance sheet that would allow us to be a consolidator. And so we are excited to have that opportunity. However, if something doesn’t meet the quality that we need and if something doesn’t offer an attractive enough financial return, we are just not going to be there and so that’s why you have seen us pretty quiet ever since the announcement of the ARCP transaction, which was just about 12 months ago.

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

Hey, guys. It’s Ross Nussbaum here with Jeremy.

Hi, Ross.

David, how much longer is the portfolio transformation actually going to last?

I think we can answer it in two different ways. From the perspective of the transformation that Dan and I originally started talking about probably 6 years ago or so, I would say, we are done. So, the scary part – the hardest part, the dilutive part that the most challenging part of selling true non-institutional quality real estate is overwhelmingly finished at this point. Massive progress has been made from an absolute peak of around 800 assets in early 2007 down to about 400 today. And so I think from what we have defined historically as the transformation we would say we are overwhelmingly done with that effort. I think the next steps of it going forward represents something much closer to portfolio management exercise of looking at the entirety of what we own and saying what represents something that has either lower growth or higher risk over time, but generally still talking about very institutional quality assets and other in some cases even savvy buyers have seen opportunity and where we think our capital is best allocated elsewhere. So, we really look at this as the continued refinement of the portfolio. I think a little bit of what you saw this quarter, the last steps of the cleanup of the land bank, but in terms of the operating portfolio really just the continued refinement to focus more clearly our capital and therefore also our team’s time on the highest quality assets in the portfolio. So, I look at this as something that should be a constant process for this company to continue to improve portfolio quality and to continue to maximize value were reduced to come with some of the negatives associated with those sort of activities, like considerable dilution or earnings headwinds. This is one where we think we can improve the long-term growth rate and the long-term opportunity to create value in the portfolio by some of these sales as well as the reallocation of that capital of certain acquisition and redevelopment activities over time. And I hope I get to tell you for a long period of time that we are continuing down that path even if it doesn’t represent a massive transformation like the one that occurred over the past 5 to 6 years was, but also one that significantly improved quality with the addition now of some earnings dilution.

The next question is from Haendel St. Juste of Morgan Stanley. Please go ahead.

Hey, good morning out there.

Hello.

So, David, a question for you on the persistent discount that DDR still appears to trade at versus your peers and to your underlying asset value, you have made significant progress over the past few years improving the quality of your balance sheet, your portfolio, the Puerto Rico assets continued to do well despite negative headlines for the island, power center cap rates have compressed, the CEO transition is over and the strategy of focusing on long-term high quality assets is the one we agree with despite perhaps some short-term dilution headwind. So the question for you, as you think about all of that what do you think perhaps investors aren’t appreciating or getting about your strategy and why that discount persists?

Yes. I think for us there is some level of frustration with the discount, but the reality is our focus has to be creating value within the portfolio and the challenge for analysts and investors is recognizing that value and changing some of that discount. But I think for us where we see the greatest misunderstanding is in the portfolio of quality, it’s one of the reasons while a very simple addition to the front of our supplemental package we have added the top 50 assets. We have always included a property table in the back that included all of the assets. But I think for us we consistently feel like the quality of the portfolio is missed and so what can we do to make it easier for people to realize that. Some of that’s running around with groups like the ones you put together to do property tours in various cities and some of it is improving our disclosure so that is more clear what assets truly drive the performance of this company. And so those top 50 assets that we break out earlier in the supplement, I think are helpful in getting people to recognize the quality of the portfolio. One thing we have always struggled with the portfolio upgrade over the past several years is that it’s much easier to show our portfolio improvement if you buy one trophy asset particularly in an investor-oriented sort of market, it’s much harder to show portfolio improvement. When you sell 400 low quality assets in much smaller less traveled to markets, obviously no one is doing that property tour of what you don’t own anymore even though from an internal perspective from a relationship with tenant perspective from where leasing managers are allocating time perspective the sale of the low quality assets actually does a lot more to improve portfolio quality than the addition of one or two trophy assets. And so I think that’s where we can continue to struggle to make sure we are telling the best story so that people understand the quality of the portfolio that exists today. Obviously, at the same time while we are executing on the next legs of making that store even more significantly true with transactional activity is driving even better portfolio as we look out a couple of years.

And the next question comes from Tammi Fique of Wells Fargo Securities. Please go ahead.

Thank you. I am just curious there is a range of disposition volumes kind of embedded in the guidance range that you gave for the year, I guess I am just curious what that is and at know what cap rate? Thank you.

Yes. I mean when you think about that overall $0.05 range on 360 plus million shares you get to a spread in FFO that can be made up from a number of things. Part of it’s to get us to the low end is accelerated. Refinancing activity where you take advantage of low rates, but you add additional capital and potentially sit on is the cash sooner rather than later. Some of it is earlier sales volume, some of it is greater sales volume, some of it was a concern months ago that bankruptcy season could have been worst than what it was. And so you eliminate some of those downside scenarios, but then give yourself additional opportunity to either sell more or accelerate financing activity in other cases. And so I can’t say that there is a specific range that that we have outlined just related to the single variable of disposition volume and pricing, but I would say we continue to be comfortable that our range is achievable even it being very meaningful ahead today of our disposition volume and so pricing is coming in a little bit better, but the volume of dispositions and the timing early on the year is significantly ahead of our expectations. And so today if we did end up $100 million to $200 million ahead on dispositions and thinking about the 2015 period alone having those much more heavily first half weighted on the – on the dispositions and second half weighted on the investments, I think even with all that, our overall guidance range is something we remain comfortable with based on the original way that we budgeted it in some of the cushion that we built in, particularly on the low end, so that we wouldn’t be prevented from taking advantage of either a strong financing environment or a strong disposition environment.

The next question comes from Alex Goldfarb of Sandler O'Neill. Please go ahead.

Good morning. First, thank you for the added 50 asset disclosure. David, I guess the two-part question here. It’s the same topic. One, are we done with the major write-offs or the write-offs? And then two, on operating FFO to regular FFO, does this mean now that DDR, the operating FFO that you guys report is basically going to be the same as reported FFO?

Yes, I would say from a very comprehensive analysis that we have done over the past several months thinking about potential sales candidates, the timing of those and then how that flows into our book value for those assets versus what we think is the market value at a time that we might sell it. I do very much think that this is it in terms of any sort of significant impairment activity. I think when we entered into this analysis we wanted to make sure that we could answer that question with confidence. If the environment changes, it certainly means that valuations can change, but I think where we stand today, we believe that we have included everything into this analysis and would not expect some of the regular quarterly noise that you have seen over the past several years. And therefore, we would also think that operating FFO should look extraordinarily close to NAREIT defined reported FFO. There can always be certain truly one-time items. And I will tell you certainly with some of the transitional events that we are going through here, there is the potential that those sort of things could happen. There is the potential that as we work our way through some of the simplifications, some of the joint venture exits that we have gone through and continue to contemplate in other cases where there could be additional friction in the near-term, but I would say the overwhelming majority of it should be gone in on a go forward basis. I think operating FFO should look extremely close to NAREIT defined reported FFO, which we have consistently given, but obviously have included certain add-backs that we thought were more appropriate simply as we take the view on what’s the right way for people to look at the company, but I think on a go forward basis, it becomes even simpler.

The next question comes from Vincent Chao of Deutsche Bank. Please go ahead.

Hey, guys. I just want to go back to guidance for a second, I know we just talked about a little bit in terms of the ins and outs and some of the puts and takes that were baked into the original range, but if we think about sort of the discussion here, dispositions being accelerated and also larger maybe than initially anticipated and first quarter same-store NOI negatively impacted by higher than expected snow removal, some of the other operating metrics being maintained in terms of the outlook. Just curious, does that really leave sort of refinancing timing as the main sort of upside lever to keep you sort of comfortable with the range as opposed to maybe trending towards the lower end?

I mean, I would honestly say when we talk about refinancings role in this it’s probably one of the negatives in terms of our expectation and our execution so far to raise the $500 million 10-year bonds earlier than we expected. So, you have some savings from the redo of the credit facilities, but I think the larger picture issues we are looking at in terms of what’s the right financing strategy for this company? More often, those are going to be slightly detrimental to FFO per share for 2015 than beneficial. So, I think that’s another thing we generally think of is working against us slightly. Certainly, when you are thinking about the top of the range higher disposition volumes and earlier refinance volumes make that much more difficult to achieve. That said, we do think we budgeted appropriately and we do see very strong operations continuing, I think the historically bad weather in the first quarter is absolutely a drag and was absolutely something that we would expect to be non-recurring and allow for better results through the rest of the year, but when we take everything into account in terms of operations, financing and transactional activity, we remain comfortable with the range and think that, that will continue to show one of the better growth rates for FFO per share within the sector even during the year where we improved the portfolio quality and improved the balance sheet.

The next question comes from Caitlin Burrows of Goldman Sachs. Please go ahead.

Hi, good morning. As you dispose of assets in the U.S., this makes your Puerto Rico exposure naturally increase, I mean, actually on your new disclosure page, I see three of the top five centers by revenue are in Puerto Rico. Could you just talk about whether this increased exposure concerns you regarding the retailer and shopper demand, but also the local economy in politics on the island?

Yes. We certainly acknowledge that we do have larger investments, I mean, Puerto Rico than others and then some of our largest assets are down there. They are also on their top 50 list and it’s top of that top 50 list, because of just how good those assets are and just how well they have held up over the past few years. Selling assets in the domestic U.S. had certainly in the mainland U.S. has certainly slightly potentially increased our percentage exposure to Puerto Rico. On the other side, when you look at the redevelopment activity and the acquisition activity from last year where we did increase U.S. exposure, I think overall the Puerto Rico figures have remained pretty consistent. And so I think we are comfortable with our investment down there, particularly because so much of it is contained in those top three assets that you note from the charts. On the broader question, are we concerned about the financial situation on the island? Absolutely, it’s something where we have been actively following it. We have been actively involved. We are pleased that we could work through our tax restructure in a way that benefited the island it terms of their interest in current cash, but our ability to significantly lower our long-term tax rates on the island. And the toughest part now was the uncertainty, not knowing exactly how the tax structure is going to be changed, how that tracks is going to be implemented in what that exact tax rate is going to be. There is nothing a market dislikes more than uncertainty if we would at least get the news of what the new structure and a rate was going to be. Then I think everyone can plan accordingly, but the period today of uncertainty is the toughest period. So, I think from a macro standpoint, we have to acknowledge all of that. From a micro standpoint, we have got high-quality, high credit U.S. domicile tenants paying U.S. dollar rent and doing very strong sales per square foot on the island. And so I think when we think about it from a pure real estate or DDR portfolio perspective is the dollar rent from Wal-Mart and San Juan, different from a dollar rent from Wal-Mart in Chicago or Dallas, we really don’t think so particularly when the occupancy cost because of the high sales volume is even better positioned on the island than it is here today. And so we are very carefully monitoring the performance of our assets. We are carefully monitoring some of the canary and coal mine sort of metrics like accounts receivable or 120 day more greater accounts receivable and not seen any great signs of concern when we look at how our assets are performing or our tenants are performing. And so we continue to stand by that in terms of what matters most for DDR’s very valuable investment on the island.

Yes, Caitlin, this is Paul. I mean, they are jumping ahead a few more specifics. As David mentioned, there is still strong metrics and opportunities on the island giving even with the uncertainty, we are just completing large redevelopments at all. So, in Hondo, two great projects finishing deals with people like Outback and Dave & Busters and H&M, these are big deals that are still happening on the island that everybody is concerned about. Still the consumer mentality we spend a lot of years transitioning from a local tenant base portfolio to a national base as David mentioned. And we are down to 15% of our tenant base were rent through out the Island is local versus national which is significant and something we stay focused on. I wonder since you brought Puerto Rico I want to give a shout out to our friends at Tobin [ph] I’m sure most of you have seen that beautiful project they built at San Juan opening timing tough but we are quite confident its going to be big success over time and helpful to all of us that have space on the island.

The next question comes from Jim Sullivan at Cowen Group. Please go ahead.

David, your same-store NOI metric does not include major redevelopments obviously a contrast to many of your peers, is there a targeted number or metric that you have either as a number of centers or as a percentage of the portfolio that you believe might clear the hurdle for a major redevelopment investment and can you clarify what that hurdle might be in terms of return on cost?

Yes. I think it’s a good question Jim in terms of the way one, we think about the projects and two then how they will show up in reported results. And while you haven’t had much time to go through it, yes given the release of the new supplemental format last night I hope you do notice that we have taken some time to try to answer that question or part of that question with our disclosure where we break out, major redevelopments versus minor redevelopments and then everything else just being sort of re-leasing CapEx. And so while we can’t give an exact rule in terms of above or below a certain dollar threshold, I do think we internally characterize the assets and the projects into those couple of buckets so that we can present them in our development section in a way where people can understand here the handful of really big projects that anyone would call a redevelopment and here is the larger number of small projects in some cases are truly development, some cases are more in that just larger scale re-leasing budget. But overall for us when we were thinking about these projects it continues to be a very large number of $5 million to $15 million projects. And in those cases I think we are absolutely focused on considerable value creation. At this point I can tell you that means 9% to 11% average returns on the incremental capital invested into those projects and that we continue to achieve those returns that we have underwritten and in some cases are finding that we can do even better. The largest scale redevelopments at times particularly the two large California projects can be lower returns in that partially because of the very low cap rate environment that those assets would trade in before they are located as well as the quality of the asset, so we can accept something lower on those projects and still have extraordinary value creation in the larger projects like that to get a very significant focus from much larger group of people at this company and where we continue to move forward and continue to see successful execution that should lead to considerable and noticeable value creation on the large-scale projects and considerable although less noticeable value creation on that smaller scale redevelopment bucket of projects.

The next question comes from Rich Moore of RBC Capital Markets. Please go ahead.

Hi, good morning guys. My question Dave is first on any plan board changes you might have and then kind of on the same lines if you could talk about any organizational changes that you have either already done, it looks like some on the website are planning especially on the operating front, the operating side of the business and in particular what’s your plan to do with Paul’s contract when you renew that I think it expires into this year if I’m not mistaken.

David, let me jump in and Rich will address me. This is Paul. Couple of things, one I really love this business and as you guys heard today we have got a lot going on and it’s a lot of fun being here right now. I am completely engaged and focused on continuing to lead the leasing and development teams as we get this portfolio in positioned for the long-term sustainable growth, Luke and Dave have been talking about. We also have a phenomenal team in place here, especially at the leadership levels and it’s something that David, Luke and I look at constantly what the makeup of the organization is. And I am quite serving whatever the time is appropriate, we will be prepared for an effective and seamless transition whenever that maybe.

Yes. In terms of the other items, particularly related to the board with our proxy released several weeks ago, you will see several changes in the nominees. On the addition side, Alexander Otto will be joining our board. So, historically, he has nominated two directors to represent him this year. He is nominating one director and he is also personally standing for reelection and so an interesting dynamic we are not just two great representatives of our largest shareholder will be in the room, but the shareholder himself will be in the boardroom with us. And so I think positive in terms of his indication and interest in spending even more time on his investment here in addition to, if you go through the details of proxy having invested additional capital into its investment in DDR past year. So, I think a positive addition there on someone that has a huge amount of skin in the game perfectly aligned with our other investors and someone with very, very deep shopping center, operational and development experience and broader real estate experience in the U.S. and in Europe and retail experience. Other changes, there are two directors – two other directors not standing for reelection, both of which who have served us very well over a period of time, especially most recently the challenging time through the downturn, through the company and several management changes. And so I think those changes are clearly reflected in the proxy. The board gets a little bit smaller. I think it can work very well at that size, but it also positions us to have an opening to add additional talent over time as we potentially locate the right additional members there, but very pleased with the slate that we have in place and have nominated for this year. In terms of organizational change, I think this company has been in very good shape over the past several years. I think there are certainly some refinements that we are making there. I don’t think there has been massive change to the leadership of the company outside of changes in titles for Luke and I but I think we are very early in what hopefully is a very long-term opportunity to run this company. And so there is no rush to make immediate change. I think there is an opportunity for us to evaluate what we think is best to manage this company for a long period of time. And so you may see some changes, but certainly not a massive part of the plan given the incredible quality of the team that we think we have in place today and that particularly relates to the exact comments that Paul always was making earlier about his leadership position as well as a very strong group of individuals under him, not to create any alarm, but also not to the call Paul’s contract out, none of us have contracts beyond the end of this year and it doesn’t mean that all of us expect to be leaving. We have obviously had a lot of other things to deal with and we will figure out the contractual nature of the team going forward, but I think you have got a large talented and extremely committed and motivated team here that’s excited for the opportunity that lies ahead of us.

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

Good morning, guys. Just a follow-up on guidance questions, I guess, I am just trying to understand maybe what the thought process is at this point given that initial guidance was essentially what 250 acquisitions, 250 dispositions? I haven’t heard anything more specific than sort of a front half disposition versus back half acquisition, I guess a couple questions. One is sort of David on the acquisition side what level of confidence do you have right now as it relates to reaching that level of acquisition volume is there anything under contract what volume of opportunities are you seeing out there on the stuff that you like. And then I am just trying to understand what the spread likely will be when we get to the end of the year between the acquisitions and dispositions in terms of volume?

Yes. I think it’s reasonable to dig into some of those assumptions. Obviously, the transactions market that we are seeing today makes the disposition environment much stronger and therefore easier than the acquisitions environment just because it’s not easy, it doesn’t mean that I don’t think that we have an exceptional team that can identify some unique acquisition opportunities and would be hopeful that over the next several months we are able to execute on about $100 million of those and then hopefully filling the rest in the second half of the year. I am confident in this team finding enough acquisitions to get us to that $250 million of guidance. And even more importantly doing so on deals that we view are attractive doing so on deals that we view are case study sort of transactions that we want to show the investment community exactly what we are doing and so its not going to be easy to find attractively priced deals. You can obviously always spend more money if you are willing to compromise. You are disciplined, but I think even without doing that I do continue to feel confident and under Luke’s leadership the transaction team can find $250 million of acquisitions. Then hopefully we even have some of that to show you in the second quarter, but certainly in the second half of the year the way we were thinking about it today probably most likely outcome is at least $100 million of net dispositions and potentially $200 million of net dispositions just based on achieving our $250 million of acquisition guidance, but exceeding our $250 million of original disposition guidance. I think other places within the budget where we see opportunity is recalling back to the fall are we are making these plans and there existed uncertainty regarding management. I do think that we had to budget very carefully and so I think we continue to find that in some cases on the G&A side, there are opportunities. We are basically assuming that we would have a CEO in addition to the team that we have in place as opposed to the board ending up providing the mandate to the existing team. And so I think there is some efficiency there that can be picked up. I think in other cases we had as we usually do carefully budgeted on the operating side, where we did forecast a larger than prior year bankruptcy volume. And so I think we continue to find opportunities on the operating side of the budget where our strong platform is executed well, but also we budgeted appropriately. And so there are little bits of upside that we also find there. Some of that’s exact end of year number plays out and the lease termination fees and other shorter term things, but I think when we are truly thinking about the strength of the platform and the portfolio today continue to be pleased that operations are contributing to us continuing to be comfortable with the range despite an accelerated and higher than budgeted disposition volume.

Your next question comes from Tayo Okusanya. Please go ahead.

Yes. Good morning gentlemen. Just two questions for me. First of all just would be Excel deal and again the implied cap rate on that transaction, just curious if you think and as new implications for you or for any of the other REITs that have a meaningful amount of big box retail within their portfolio?

Yes, hi, Tayo. It’s Luke. I think it absolutely has implications for other REITs. I think we can think it’s a low 6. We did do a lot of underwriting on that portfolio. We look at a lot of things with and in conjunction with Blackstone. So I think the pricing that the market has seen is probably about right. There are some very, very good assets in that portfolio, but we feel the quality across the portfolio probably isn’t something that really speaks to DDR. As David noted in his opening remarks continual focus on quality of dirt and location really means that any sort of portfolio deal really it does have to be unique and has to be very attractively priced. So it’s still on that basis didn’t quite bite the boxes.

The next question comes from Anthony Hau of SunTrust. Please go ahead,

Good morning guys. Thanks for taking my question. Sorry if I missed this, but in your last quarter prepared remarks you mentioned that you intend to access unsecured bond market later this year, now that you have got close $400 million our term loans, you would pay half the maturing debt, are you guys still contemplating on accessing the bond market later this year and what is the timing of that?

Yes. This is Luke, so the answer is yes we still are – we still have about $900 million of consolidated mortgages on secured facility is coming due. So the $400 million as I noted funds almost half of it but we still feel that there is an opportunity for us to coming to the market in the second half of the year. The benefit of having the undrawn term loan allows us to choose when we draw on that so that we can do a bond deal earlier in the second half if we choose and we see the rights are opportunistically priced for us. But at the moment we do have an intention to come to the second half to help broaden some of the maturities.

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

Thank you very much for joining us and your continued support. And we look forward to seeing you either at RECON or at NAREIT. Thank you. Bye.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.