SITE Centers Corp. (SITC) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the DDR Corp., Third Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 & Development, Paul Freddo. Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand these statements are subject to risks and uncertainties, and actual results may differ materially from the forward-looking statements. Additional information about such risks and uncertainties that could cause actual results to differ may be found in the press release issued yesterday and the documents that we filed 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 our call. I’d like to discuss four topics this morning including the advances that we have made internally and the three pillars that I discussed on the prior call which include progress on portfolio upgrade and the focus on quality of dirt and laser focus capital allocation and lower risk profile. Internal progress continues to exceed share price performance; the divergence that we believe will narrow over time. Our most significant internal strategy this quarter was the completion of three weeks of portfolio reviews, and reinstating this process allowed fresh eyes to analyze the portfolio for new opportunities including expansion, redevelopment, disposition, and exploring the highest and best use for our real estate. I’m very pleased with the results of the reviews. We identified over a dozen new expansion opportunities in several new redevelopment projects including opportunities to add multi-family, self-storage, and additional ancillary uses at a number of assets. As I mentioned last quarter, there are three pillars this management team is focused on, owning the best locations for the future retail; prudent capital allocation; and executing with lower risk profile. I would like to elaborate on the focus on high quality dirt and the last legs of our portfolio transformation in detail, as we believe this is misunderstood in the market. DDR does not need to sell assets. We’re not nearly in need [ph] of any transformation; there is no disposition program. We have sold nearly 500 assets in third session and last remaining assets that we have identified for sale are of a much higher quality and are being marketed opportunistically as a result of high market pricing. These are largely what we describe as prime minus assets characterized by growth for lower prime portfolio or risk in out years that is underappreciated today. Given current pricing for these assets continues to be in the 6% to low 7% cap rate range, we have taken a sense that this is a prudent time in the cycle to sell more than we are buying. Surprisingly, we’re selling the bottom tier of our portfolio with the pricing range that is comparable to the implied cap rate at which DDR is traded over the course of the past few months. Regardless, this decision should not be misinterpreted as downplaying the quality of our portfolio; it is more simply stance, different than Peter’s [ph] that selling in the historically high pricing is prudent. We have a rigorous asset quality prism that all assets are run through and we will not sacrifice our standards to align the short term bull market strategies. While the decision of sale when prices are high appears to be out of favor in the current market, we are confident that the judicious capital allocation decision will prepare DDR to outperform in all cycles going forward. The second pillar on which we are focused is capital allocation which was evident this quarter in higher net effective rents and prudent spending on minor redevelopments on. Our operations team is increasingly focused on return on capital which resulted in the second highest average in net effective rents since third session. And we believe that improved deal economics create more value for our shareholders than quarterly volume statistics. The third pillar on which we continue to execute is operating with a lower risk profile, which was reflected in our decision to sell good assets with suboptimal credit or growth profiles and augment our portfolio to include more power centers situated on the highest quality dirt. While many market participants define it as simply by quantitative leverage metrics, we feel the quality of our EBITDA is at least as important as its ratio to debt. And we will continue to upgrade the income stream to both -- to perform in both bull and bear markets. With that said we intend to be a net seller of assets in 2015 and potentially 2016 and therefore should benefit from debt to EBITDA reduction in the coming quarters. Additionally, subsequent to quarter-end, we issued $400 million of 10-year unsecured notes for the 4.25% coupon. The proceeds from this issuance will be used to repay $350 million of convertible notes in November. Our decision to commence the offering prior to the maturity of convertible notes despite the market volatility and cost of carry is directly representative of our focus on reduced risk when it comes to liquidity, duration and highly of capital raises. To conclude, our team comes to work every day focused on building a fortress portfolio of power centers, allocating capital prudently to provide the best risk adjusted returns for our shareholders and by operating at the level of risk to allow for outsized growth in the strong market and sustainable cash flow and refinancing capacity in a weaker one. We appreciate the support of both our board and those long-term investors who recognize this as a long cycle business and have supported the Company. As I mentioned on last quarter’s call, this team does not take underperformance lightly. However, we have conviction that steps undertaken today will result in increased net asset value position over the long term. I will now turn the call over to Paul.

Thanks, David. The overall leasing environment and operating fundamentals remained positive in the third quarter. We continued to experience strong retailer demand and deal volume as we executed 382 million new deals and renewals for 2.9 million square feet, a significant volume for a portfolio that is 95.5% leased. I’d like to specifically highlight the starting rents for new deals and renewals at $19.70 per square foot and $15.75 per square foot respectively, both great numbers and indicative of the leasing environment and the consistently improving quality of our portfolio. Furthermore, net effective rent per square foot for new deals at $15.78 represents the strongest performance in years and cost as percentage of net effective rent remained in line with our historical average. Same-store NOI was also strong in the third quarter as the 3.2% increase is in line with our top quarters in the past several years. Leading same-store growth were highly occupied prime plus assets that continued to generate significant mark-to-market opportunities. For example, the top contributing assets this quarter were Midtown Miami, Shoppers World in Boston and Woodfield Village in Chicago, three of our highest quality assets. All three benefitted from strong new lease growth and remerchandising efforts as we added the likes of Nordstrom Rack, Cost Plus and Trader Joe’s respectively. Turning to spreads: For the quarter, we achieved a positive pro rata new deal spread of 12.3% and a positive pro rata renewal spread of 7.1%, resulting in a combined pro rata spread of 7.9%. While the new deal spread is lower than the recent past, it is important to note that we had a smaller number of box deals in our account [ph] pool than in the last few quarters and the larger box deals naturally have the most significant impact on spreads. Rent trends, as evidenced by the strong starting rents and net effective rents, remain very positive and we expect new deals spreads to remain comfortably in the double-digit for the foreseeable future. It is also worth noting that 81% of all new deals and 42% of renewals and options executed this quarter contained rent bumps within their initial terms, leading to additional growth beyond the reported spreads which of course are based on first year cash rental with a last year cash rent and do not reflect this additional growth from contractual increases. This focus on rent steps is one of the most significant recent changes we have made as we negotiate and analyze deals and one that we continued to leverage during the quarter in which we experienced a tenant retention rate of over 90% versus a typical retention rate of 85%. Our overall leased rate remained flat quarter-over-quarter at 95.5%. The flat leased rate was due to a few fasters. First, we continued to sell low growth assets with leased rates in the high 90s to 100% and in the third quarter sold 2.3 million square feet with an average leased rate of 96.5%. The second contributing factor was the signing of new leases on spaces that were already included in the leased rate. Despite significant leasing volume resulting in improved tenant mix and credit quality, these deals resulted in little impact on leased rate. Third, we continued to encourage vacancy from weaker tenants such as Kmart in an effort to further increase the quality and mix of our centers. As we have talked about on many occasions, this focus on improving the caliber of our tenancy will result in mixed results in a leased rate on a quarter-by-quarter basis. With that said, we continue to make progress in the small shop category at the lease rate for space under 5,000 square feet increased 50 basis points sequentially, driven primarily by strong net absorption. I’d like to take a few moments to update you on the progress we are making in two of our larger redevelopment projects, The Pike Outlets in Long Beach, California; and Sycamore Crossing in Cincinnati, Ohio. The Pike Outlets located in Long Beach is a 363,000 square-foot outlet center serving several communities in Los Angeles County including Huntington Beach and Newport Beach. After a thorough analysis, we found a significant void in the surrounding trade area for a mix outlet tenants and made a decision to proceed with the format in 2013. Following a tremendous effort from our leasing team, we held a grand reopening on October 2nd, and tenants including Nike Factory, H&M, F21 Red, Converse Factory and Gap Factory all opened strong and are performing well. Furthermore, earlier this year, Restoration Hardware outlet nearly doubled its size, store cycle and expansion; and they continue to perform extremely well. In addition to the recent openings, we now have signed leases with Columbia Sportswear, Cotton-On, Hot Topic and Starbucks. The Pike Outlets is now 88% leased and we have strong retailer interest for the remaining space. As a further demonstration of support for this redevelopment, Cinemark underwent a multimillion dollar renovation to bring their latest and greatest technology, seating, and customer experience to the project. All major redevelopment work will be complete in the fourth quarter and we expect the project to be stabilized in the third quarter of 2016. The second project is Sycamore Crossing in Cincinnati, Ohio. Located directly across from Kenwood Mall and a dense retail corridor with average household incomes of $89,000, Sycamore Crossing is a 390,000 square-foot prime plus shopping centre, also undergoing a major redevelopment. Sycamore was initially acquired in a JV with Blackstone in 2013 and we acquired Blackstone’s interest in 2014. Given strong retailer demand and the center’s location in the heart of the number one shopping area in Ohio, we saw the opportunity to invest and significantly drive NOI and create value. At acquisition, the center included an undersized and non-prototyped Dick’s Sporting Goods and oversight [ph] Staples, naked leases for Barnes & Noble, and Old Navy and significant vacancy. Other existing tenants included the Fresh Market, Macy’s Furniture and Ulta. We have allowed the Barnes and Old Navy leases to expire and right-sized and relocated Staples to make way for a new state of the art, two-level Dick’s Sporting Goods and a new Five Below. We have also backfilled Barnes & Noble with T.J.Maxx and are in active negotiations with other best in class retailers for an additional 50,000 square feet. Staples opened in a new space at the beginning of October and Dick’s Sporting Goods will be opening along with Five Below during the fourth quarter of 2016. When complete, this will be the dominant power center in the strongest submarket in the MSA with a grocery component and further opportunity for NOI growth and value enhancement. To provide an update on Puerto Rico, which comprises approximately 10% of pro rata based rental revenue, I would like to reiterate a few important points that I mentioned on our call last quarter. 90% of our Puerto Rico portfolio value was comprised of prime plus or prime assets; 60% of the portfolio value is in the top three prime plus malls; and 70% of the base rent is arrived from U.S. based creditworthy tenants, all of which emphasize the quality of our portfolio and cash flows on the island. While the macro environment continues to be traded poorly in the media, year-to-date we have experienced 360,000 square feet of total leasing activity on the island and continue to see reported sales across our entire portfolio that are relatively flat on a rolling 12-month basis with four of our top five assets actually reporting small sales gains. From a deal perspective, we are still seeing new retailers who view the island as an attractive location as they look to expand. In addition to the Dave & Buster’s deal we executed during the second quarter for their first location on the island at Plaza del sol. In the third quarter, we signed a lease with H&M for one of their first two locations on the island at Plaza del sol with an opening date in late 2016. These are significant additions to our top asset on the island and represent strong statements regarding retailers’ views of the long-term strength of retail in Puerto Rico. As noted previously, we recently recaptured two Kmart fosters [ph] in Puerto Rico at natural lease expiration. Kmart departures did have an immediate impact on our occupancy but will have minimal impact on our NOI stream as rents for these spaces are significantly below market and ultimately will result in attractive opportunities for rent growth and merchandising improvement. In closing I’d also like to turn your attention to a new disclosure in our quarterly supplement indicating which of our properties including the grocery component. As you know we have consistently referred to as a preeminent owner of high quality power centers which while we agree with the characterization fails to account for the everyday traffic that more than two-thirds of our properties benefit from with tenants offering groceries such as Walmart, the world’s largest grocer and others include Sprouts, Kroger, Publix and Whole Foods. As you know from private market pricing, top power centers with a grocery component and top MSAs are consistently trading in the mid-5% cap rate range. And we thought it’s appropriate to highlight our significant exposure to this property type. I’ll now turn the call over to Luke.

Operating FFO was $113.5 million or $0.31 a share for the third quarter, which was 6.9% increase over the prior year. Including non-operating items, FFO for the quarter was $113.4 million, also $0.31 per share. Non-operating items consisted of transaction costs. I’d like to begin today by providing more color on our quarterly and year-to-date transactional activities and the final stages of our portfolio repositioning. During the third quarter, we closed on the sale of 19 institutional quality operating assets for a 143 million at our share, bringing full year share of dispositions to 358 million with an additional 268 million on the contracts that we expect to close by year-end. As David mentioned, we have exceeded our original disposition guidance because the current environment exhibits extremely attractive pricing for our product term. [Ph] I’d like to emphasize that our dispositions today are not comparable to the assets we sold shortly during or after the recession. Our dispositions in 2009 sold for weighted average cap rate of about 9%. These assets were primarily located in tertiary markets, had weak merchandising mix, and the mediocre quality of the real estate kept occupancy level challenged following retailer bankruptcies. In contrast, our year-to-date dispositions are sold for weighted average cap rate in the low to -- or mid to low 7 and have an average of a 125,000 square feet and 97% leased. These assets are stabilized, institutional quality centers but typically have lower growth profile than we underwrite in our prime plus assets. To illustrate this further, we sold to an institutional buyer a Walmart neighborhood anchored power center located in North Charleston, South Carolina, at the end of the third quarter for a mid-6 cap rate, nearly a 150 basis points inside our internal valuation. The center has a decent merchandising mix, solid credit from national tenants and some future growth but minimal opportunities for value creation and is situated in a site [ph] that may post risk of selling vacancies in the next downturn. We are also on the contract to sell a prime minus fresh market anchored stabilized power center in Chattanooga, Tennessee for a sub-6 cap rate. The center’s other tenancies include Hobby Lobby, Shoe Carnival and Best Buy, all of which are generating good sale volumes. Both of these examples highlight a focus on opportunistically rotating our capital into other opportunities which will deliver the higher longer term returns to our shareholders. This is something we will continue to do if this level of pricing persists. To-date, we have additionally sold 14 assets from our third joint venture with Blackstone, totaling 213 million at a price approximately $0.20 higher than our acquisition just 12 months ago. The sale of these assets contemplated prior to the acquisition has not had any impact on the 300 million of preferred equity issued to the joint venture. But we do expect the balance to reduce ratably as we continue to sell the lower quality assets in the joint venture. We ended the third quarter with 626 million of assets sold or under contract and we remain confident that we will meet our original acquisition guidance of 250 million at the end of the year and end the year as a net seller. I want to spend a few minutes now looking into 2016, our residual non-prime portfolio and our expectation for further portfolio enhancements. We currently have 30 wholly-owned non-prime assets, representing approximately 4% of our value and estimate by the end of the year ‘16 there will be less than a dozen assets representing 2% of the value. We want to ensure people understand that due to the significant reduction of this non-prime tool, any further dispositions will be considered with extreme price sensitivity. If the transaction markets continue to exhibit the depths and strengths that we have seen in 2015, we will continue to opportunistically take advantage of them in 2016 and be a net seller, although most likely to a smaller magnitude than ‘15. Conversely, if pricing softens, we are absolutely comfortable with our portfolio with its tenancy and locations that we can generate appropriate returns throughout the next cycle and are confident that the considerable net proceeds writes issue [ph] can be effectively reinvested in the future. With regard to our joint venture platform, we continue to review with our institutional capital partners, the pruning of their portfolios over time. However, due to our minority economic interest which varies from 5% to 20%, the economic impact is minimal. Turning to capital markets activity: After observing the volatility and the unsecured debt marketing in late Q3, we are extremely pleased to issue 400 million of 10-year unsecured notes at 4.25% coupon earlier this year, early this month and take advantage of a sub-2% U.S. treasury. The issuance is nearly five times oversubscribed, allowing us to price inside expectations and roughly in line with our secondary. The proceeds will be used to fund the November redemption of 350 million of convertible notes and the remainder will use to pay down our line of credit. With the anticipated near-term asset sales, we feel that we have sufficient liquidity that we’ll be able to fund all upcoming debt maturities and are not required to raise any further capital for at least 12 months and possibly longer. As David mentioned, one of the three pillars by which this new management team is operating is an increased on the appropriate risk profile. While we continue to underwrite new acquisition and redevelopment opportunities, we anticipate that asset disposition proceeds as well as EBITDA growth will allow us to lower debt to EBITDA by one turn in the next two years. However, we continue to acknowledge that risk reduction goes beyond net debt to EBITDA ration. And prudent capital allocation has allowed us to capitalize on favorable market trends to better position our portfolio for long-term value creation. With that I’ll hand the call back to David.

Thanks, Luke. I would like to conclude by updating you on our 2015 full-year operating FFO per share guidance. We are now forecasting a range of $1.21 to $1.24 per share, representing a $0.1 tightening on both the ends and a mid point that continues to alight with our original 2015 guidance and equates to 6% growth over 2014. We will release 2016 earnings guidance in January as the normal practice. And we feel confident that the strength of our operating fundamentals, and our ability to source new acquisitions, reduce expenses, and find new key strings [ph] will mitigate earnings dilution from a considerable opportunistic asset sale program that is currently forecasted in the market and will continue to allow us to grow, both in the short term and in the long term. Thanks for your time. And I’ll now ask the operator to open the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Todd Thomas of KeyBanc Capital.

David, you talked briefly about the portfolio reviews and that you’ve identified more than dozen new expansions and some development opportunities including some densification projects, I guess adding other uses, you mentioned like multifamily of self-storage. Can you just provide some color on these future opportunities; what the scope might look like over time? And then in instances where there are other uses involved, whether DDR would look to bring in a partner or whether the Company would operate some of those other properties?

Sure. I’m happy to give you a little color. I think until we advance this further, I’m not going to give extraordinary detail. But certainly we’re pleased with the progress we made going through the entire portfolio and finding opportunities where given the focus on quality locations at some points we found that there was more that we could do on a site. I think we’ve given clear guidance that near-term, we think the credible, profitable redevelopment spend is in the $100 million a year range. And so some of this goes to backfilling that pipeline as you look into the out years and some of it hopefully goes to expanding that type line, as we look at more opportunities to expand or reconfigure existing centers or just add density as we are finding a few opportunities where that’s possible, and we think very profitable. We will continue with I think very prudent stance on the fact that we think we are extremely good at operating and developing power centers and at allocating capital but not necessarily experts in other property types since we think it’s reasonable to assume that if we did find opportunities for other property types on our assets, on our locations that we would look to either monetize that or look to bring in a partner if we did pursue that where we would not be -- or highly unlikely that we would be doing that on our own at this point.

And our next question comes from Michael Bilerman of Citi.

You guys spoke a little bit about sort of the Blackstone joint venture in terms of the asset sales that have occurred since you’ve closed the deal last year. Can you sort of just talk a little bit more broadly? It looks though debt has been paid down; your preferred hasn’t been touched, I’m curious why Blackstone is not paying off the highest part of the cap structure, the most expensive. And so, can you talk a little bit about A, why that’s occurring; and then, what’s happening with that piece of paper? I think it was 300 million to start and I’ve seen they’ve gone up to 3,000. I don’t how much of that’s accounting versus actually a crude interest on your note. And how you are going to deal with this? It’s an 8.5% piece of paper, 6% of your FFO, clearly that’s going to create some headwinds once it does become redeemed, both from the debt to EBITDA perspective but also from an earnings perspective. So maybe you can just talk about it overall. Thanks.

Sure, Michael. This is Luke. So, with regards to the asset sales that have happened to-date, the original deal was that the first tranche that we knew and we allocated to sell that there was no initial pay down of the preferred. So the preferred was sized in the capital structure, so that first tranche of asset would be sold and in proceeds paid out to common which is DDR and Blackstone. Going forward, we would expect that to change as we continue to prune that portfolio down; we’d expect to see that preferred reduce. However, I would like to note that we are in a partnership with Blackstone and sales do need partner consent. So, I think that was one thing that I’d like to make sure people are aware of that we work with our partner. We have identified a group of assets that we will likely sell in next year and that is probably likely to pay down the preferred. With regards to the preferred going from 300 million to 310 million, the actual preferred is priced at 8.5%; you’re right, but 6% is payable in cash, 2% is payable in time. So the preferred slowly increases a small amount every year that is consistent with prior Blackstone deals that DDR has done. And we feel very comfortable about slowly letting that increase. And then the final point of your question is, is really regard to the conversion of the order reinvestment of the 8.5. I think probably the best way to point that out is the historical first two transactions we both had preferred equity investments. We have successfully been able to reinvest that capital into a takeout of Blackstone. I don’t want to preempt anything happening in the near term with them. However, we do have a very-very good relation with Blackstone. We do like a significant portion of the value of that portfolio and would see that the 310 million, which is probably going to reduce over the next 12 months, would be reallocated into common equity or wholly-owned assets in the medium-term.

And next we have a question from Jeremy Metz with UBS.

Hey, good morning guys. This is actually Ross Nussbaum here with Jeremy. If I think about the industry for a second, do you think that industry occupancy has peaked? I mean I look at this year, I see two big grocer bankruptcies on the coast. I look ahead to the next year and think about the future of the Sears and Kmart and a couple electronic boxes for example. Do you think that we’re in an environment where we actually could see both your occupancy as well as industry occupancy to lift a little here over the next 12 to 24 months?

No, I really don’t, Ross. I would look at full occupancy for us and most of our peers as being closer to about 96.5%. Obviously we talk about some of the deals we’re making where we are taking tenants out and replacing which is not going to be reflected in an increase in leased rate and may even short-term, if there is a lag in expiration or termination and lease signing result in a little bit of a decline in the leased rate but all for the good of a long-term growth and driving the value of the asset. Even with some of the bank -- potential bankruptcies and bankruptcies you mentioned, in our portfolio for example, we had just one A&P and we’re not going to have any problem backfilling that should that be rejected, it has not yet been rejected. And we might see a quick slip because it’s a larger box but we’ll fill it quickly. I’m still looking at a full occupancy rate of again somewhere north of 96. It’s lumpy quarter to quarter as I claimed in the script based on some of our actions. But the little bit of whether there’s an electronics and again, we don’t really see that as a real potential for near term bankruptcy, it’s been pretty good in our sector quite frankly in terms of bankruptcy. I don’t think we’re going to see this thing slip. Again you’ll see some lumpiness but I don’t think you’ll see many of us slip beyond our current levels.

The broader question from an overly macro standpoint is a very tough one. For us when you look at the 4 billion or so square feet in the total database that the national brokers will talk about, I understand your sensitivity on that question but I think exactly as Paul was saying, when you look at the higher quality portfolios like ours, we certainly don’t see any of that risk even if on a true macro basis you might be able to make a bit of case that you got one.

And our next question is from Paul Morgan of Canaccord.

Just maybe a little bit more on the dispositions, as you think about 2016, if I look at a couple of the deals that you sold in the last quarter or in some large markets Tampa, D.C. I mean how should we think about those sales? And kind of we’re used to thinking of your dispositions as being not necessarily tertiary, in a secondary market; I mean could we see more in major markets as we see them maybe being kind of flat access going forward and is that changing kind of what is your longer term pipeline.

Paul, it’s Luke. And I think that’s absolutely what you expect to see. I think we have exited from definitely as a percentage of value out of predominantly nearly all of our tertiary markets and you will start seeing it. So what we would consider prime minus assets whether they’re in Tampa or St. Louis markets that we like but we just don’t see that it has the growth profile but we feel we can reinvent our capital into our prime plus portfolio. I guess a really good way to think about that is between 2008 and 2013 we sold over 300 assets for about $2.9 billion, so a little less than $10 million per asset. Right now, we’ve got about 200 -- at the end of the third quarter, we had about 270 million under contract with 10 assets. So, the size of the assets that we are selling is 2 to 3 times larger than what we’ve done historically, which goes to show not only the quality but the size of the asset where we’re rotating out of and then obviously then the reinvestment side, we are obviously buying bigger, more dominant power centers like Willowbrook we acquired earlier this year.

And the next question is from Craig Schmidt of Bank of America.

I am going to assume there is a continued aggressive transaction market and therefore you will continue to make dispositions. And I sort of see three buckets as use of proceeds, buying prime assets; investing in your redevelopment pipeline; and paying down debt. I just wonder which of those three buckets will see the most activity.

Craig, this is Luke. So, I think we do -- as David highlighted, we do have an active redevelopment pipeline. So, we have about 100 million to 150 million, so that is something that we can allocate. So, I think then really the residual bucket is going to be particularly in the near term, between debt and new acquisitions, I think very short term is paying down debt. But we do still feel that we can find attractive -- and attractively priced opportunities to acquire new centers. We do have confidence that we can get to our 250 million for 2015, we are at a 160 million at the end of the third quarter. And I guess our two acquisitions for the year highlight our platform and our ability to find assets where we feel we can either re-tenant, and create value from mark-to-market in rent or opportunities where we find redevelopment opportunities in new acquisitions. So I do think -- I guess we do have a redevelopment bucket lined up for the next 12 months and then it’s going to be somewhat short-term debt but we do feel that we are going to be out reinvest that over the next 12 months.

And the next question is from Tayo Okusanya of Jefferies.

This is George [ph] on for Tayo. I understand the use of proceeds and the desire to a de-lever from asset sales. But I don’t know if I caught this earlier but how would you view also potentially repurchasing stock given kind of where the stock is trading relative NAV and kind of where it has traded and at a certain does it become attractive to actually do a share repurchase?

Yes, we are certainly open to it. We’ve discussed it at the management level; at the board level we have discussed it, even with shareholders at time. So far we believe we’ve taken the prudent first step which is raising capital through selling assets in a hotly priced private market. We have done a bit of that. There is considerably more under contract and we expect to be on the way. Over the next quarter or so and if the market stays as hot likely over the next year or so and naturally I think those proceeds to go to the pay down of debt but absolutely believe that that creates the capacity if we should continue to trade at a discounted private market value and extreme discount to peers that capital could certainly be used for share repurchase. So, nothing formal to announce today but certainly something that’s been discussed in advanced.

And the next question is from Alex Goldfarb with Sandler O’Neill.

David, one of the things I think you guys have been vocal about delivering this year is laying out guidance range and then achieving that despite what’s going on, on the capital markets front. From your opening remarks, I just want to clarify and confirm while you are not giving ‘16 guidance, the intention is as you guys ramp up, continue to do dispositions, the focus is still going to be on growing earnings, not growing FFO for FFO sake like historic way back when but the point is that you guys will seek to deliver sort of a steady state earnings growth that investors can bank on while also doing the normal course dispositions. Is that the correct way that we should look for the 2016 guidance when it comes out?

Yes, obviously the formal press release with guidance and normal investor and analysts follow-up that we do will be in early January. But we do think today that despite the fact that our overwhelming focus is net asset value creation over time; and we do believe that asset sales in today’s environment are key to that that we should still be able to deliver earnings growth as we look out over the next year or next several years. So, I don’t think that’s growth for the sake of growth, I think that’s a testament to the strength of both the existing portfolio, strength of our ability to source some level of aftermarket opportunistically priced acquisitions and certainly mitigate it somewhat by what we think is a considerable opportunity to sell more assets than we buy in the current market.

And our next question is from Ki Bin Kim of SunTrust.

Just a couple of cleanup questions. Could you just describe the rent per square foot for the assets that you sold this quarter and the cap rates, if I missed it? And second, in terms of Puerto Rico, is there actually a healthy bid to sell those assets if you wanted to and at what point do you consider that as part of the overall pool of assets that you eventually want to sell from the portfolio?

Hi, Ki Bin; it’s Luke. So, I’ll handle the first part that, on transactions and hand over to Paul for Puerto Rico. With regards to the cap rate, it was a low to mid-7 for the quarter for Q3. However, looking forward, I think we are probably going to be in that range to sing contract, potentially even a little bidder. With regards to the ABR per square foot, it was probably a little lower in the main -- I think with low double digits compared to where we currently as our portfolio tracks, which is significantly above that more in the 14. So I think some of that 4% year-on-year has been driven not only by just the prior quarter but the year-to-date sales and the lower ABI that we are selling.

Yes, Ki Bin. This is Paul. On Puerto Rico, we are long-term holders and owners. And I think part of what’s missed as people talk about Puerto Rico is the event we’re having right now, right; it’s down, a significant down in the cycle but we’ve seen it before. I think the couple of deals I mentioned, Dave & Buster’s, H&M and there are others that we haven’t signed yet, so can’t announce. Retailers look at it the same way we do. This is a long-term strong retail market. And while we all are focused on the downs of today that is not how we are looking at and certainly not how the retail community is looking at it.

And next we have a question from Haendel St. Juste of Morgan Stanley.

So, another question on dispositions for you David here, obviously you guys have been very active in recent years. And I understand that you’ve changed the quality of what you are selling and are selling more opportunistically at this point. But I want to get some insight from you on the pulse on 10 [ph] of the transactions markets for what you are selling. Have you noticed any change in demand or pricing in recent months given tightening of the CMBS market transferring the late summer, early fall? And then also how does demand, the number of bidders and pricing say compared to maybe three, six months ago? Thanks.

Yes. Haendel, it’s Luke. So with regards to what we’re seeing, I don’t think we’re seeing any dramatic change. And I do acknowledge that overall borrowing rates and cost of capital has increased from three to six months ago. We sold out just from our recent issuance although not at the widest point in the market but clearly debt costs have increased. I think one thing that’s helped us is that the assets that we are selling are institutional, so institutional buyers are considerably more cash invested. So, the amount of leverage they made is a lot less. I do think we will start to see maybe some impact on that lower quality portfolios that have been traded where it is heavily driven by where CMBS pricing is or CMBS debt marks are. With regards to number of bidders, we continue to see and we do have a few things particularly with partners that are -- having looked at from our buyers, we continue to see a significant number of bidders underpaid due-diligence and bid on the assets. We continue to see more and more of the real estate advisory firms seeking to grow their platform and footprint and they have raised considerable amounts of capital over the last 12 to 18 months. And we continue see them focus on buying what we’d aim institutional quality but just not prime plus assets from DDR.

And the next question will come from Mike Mueller of JP Morgan.

Just quick clarification and then the question but when you are talking about being a net seller in terms of dispositions, is that a comment just on your portfolio before any JVs held with Blackstone or was that encompassing it?

Mike, I think that’s going to be both. I think DDR will be a net seller on a wholly owned basis for the year, and then when you add Blackstone will be a slightly larger net seller. Although DDR’s pro rata share of the Blackstone -- or the Blackstone sale of 230 million is only 5%. So, our pro rata share and the numbers we’re quoting is only $10 million.

And the next question is from Jim Sullivan of Cowen Group.

Question for you David kind of a follow-on from the earlier question regarding share buyback and whether that’s kind of on the menu, things you might look at. Question I have is that with your commentary on cap rates today, I’m curious how you think about the margin and the value creation margin on your external investment, either in ground up development or perhaps value added acquisitions, take your choice? What do you think that value creation margin is, given where kind of terminal cap rates are and how you think about that as an alternative to share buybacks?

Yes, we certainly think quite a bit about that. It’s not just been the script but the focus on capital allocation is significant. And so it is a very regular exercise and extremely important to portfolio reviews but on a much more regular basis than that to say where should we be putting the next dollar or capital, does it go back to shareholders in one form or another, does it go into acquisitions, redevelopments, debt repayments, do we try to find new ground up opportunities. And so, it is a deep focus. I think different than a few years ago when we acknowledged one, there was a capital raising requirement associated with that, the sales and two, there was a need to clean up this portfolio. Today it’s focused on exactly where every dollar comes from, what that costs us and where that dollar goes, even to mid to small level leasing decisions that I think ended up resulting in higher net effective rents this quarter than we reported in a long period of time. And so I do think when we look at the overall scope of opportunities that while we can certainly say it is very aggressively priced transactions market that we do think we can find some value add acquisition opportunities. We have the team with making sure every deal that we buy is effectively a case study of how we can create value that it can become a slide in the investor presentation. Here’s how we bought Willowbrook in Houston and people dislike the overall market and when occupancy was 10 percentage points below what we thought we could achieve over time and then we need to execute on that or opportunities to grow within a certain submarket where we think we increase our pricing power, opportunities like the one in Philadelphia last year where we’re buying where we’ve got a tenant in our back pocket, so we’re simply underwriting the assets and the small amount of vacancy, very different than anyone else. And so I don’t think we want people to believe that there aren’t acquisition opportunities. We just believe that the disposition opportunity in today’s market is greater than the volume of acquisition opportunities. That’s different than only a few years ago where we were a significant net acquirer in a market that was priced very differently than the one today. And so I do think you’ll continue to see us buying some volume of attractive value add acquisition opportunities as that we talked about earlier to the portfolio review process certainly looking to backfill or even grow the redevelopment pipeline and believe that that will continue to be a very attractive use of capital. And then finally on the ground up development side as we complete these final two legacy projects, we certainly look around for other for other opportunities, but so far just haven’t found ones where the risk adjusted returns at all justify our capital. And so happy to say that we will continue to actively look there but can’t point to any additional activity on that from today.

The next question comes from Jason White of Green Street Advisors.

Hey David, just going back to your previous comments, you talked about your development pipeline, if you will; you’re continuing to look for opportunities. It seems like a little bit of a change where before you were evaluating how you thought the development of the business and whether it was worthwhile to even have a development platform. Has that been a kind of changed attack or you can walk through the slightly change in message there over time?

I did not mean it to be a change in message. I think for us we absolutely believe having a development capacity is extremely important, whether it’s ground up or whether that’s reflected in constant, really seen in small scale and hopefully some larger scale redevelopment opportunity. And so I don’t think we’ve meant to downplay that. I think in some ways when we talk about the legacy development pipeline, we have clearly meant to downplay the returns associated with returning land, for too long a period of time and even the write-down on some of that land earlier this year but the overall capacity we believe to be critically important. But like with everything else, it’s returns driven business. And we will allocate capital where we think we can make the most money for shareholders. And so, it’s something where we don’t see great opportunity today but certainly not looking to downplay that capacity within DDR.

And our next question comes from Rich Moore of RBC Capital Markets.

Hey guys, this is James Sanders [ph] on for Rich. G&A was notably lower this quarter, is that due primarily to staff reduction? And if so what areas of business do you plan to scale back the most?

No, we not do the staff reductions. I think overall we identified early on opportunities to operate more efficiently. We’ve recognized those quickly. And you’ve see in the run rate recurring G&A I think changes that have been to be implemented pretty quickly and have been consistent this quarter to last quarter and certainly lower than last year. So, no staff cuts of no department. We’re being focused -- I think there’s a high level of excitement and encouragement to the employee base and from the employee base where we’re operating more efficiently, but not running around saying how much smaller does the team need to be. We’ve got an exceptional and deep team and we’re excited to keep them around, but to still be able to operate with a little greater level of efficiency and pass those savings through to bottom-line earnings and to shareholders.

The next question is a follow-up from Michael Bilerman of Citi.

Yes, I just want to make sure I got the trajectory right just in terms of asset sales as well as G&A. So just from a net sales perspective, Luke, I think you mentioned 90 million more of acquisitions that you have full confidence to close in the fourth quarter. And you announced a couple of weeks ago that you have $268 million, your share of assets to dispose. So, call it a negative 180 in the fourth quarter. And I think you guys have talked numerous times on the call now about being a net seller in ‘16. I just don’t know the magnitude. Is that 100 million, is it 250 million, because both would have a pretty dramatic effect on your -- and I respect the focus on NAV, but clearly from an earnings perspective as you pay down cheap debt would be quite dilutive? And then I think from a G&A perspective you are on the 70 million sort of run rate, if you are sort of done with all the efficiency saves, I assume now will be back to a more pressured labor type of cost and just continue now rise from this level on a more modest basis, again as we think about next year.

Absolutely Michael, I think the easy way to look at this year is if you look at the assets under contract and the ones that are sold year-to-date, I think we’re a little above 600 million. And if you assume we’re buying around 250 million, we are probably going to be a net seller in the magnitude of around 400 million for the year. Next year, I just want to highlight what David said in his comments and what I’ve outlined, it is truly opportunistic. So, if prices remain high, I think we will be net seller, however not to a smaller magnitude than what we are in 2015. What that number is? It’s hard to say. If we continue to see 10 to 20 credible bidders bidding on assets that we feel is being overpriced compared to our internal valuation and our return on capital, we will absolutely take advantage of that pricing changes. We may not be a large net seller at all looking into next year. So, I think where we sit now, we are comfortable and we have very clear visibility till the end of this year looking into next year. From a wholly-owned basis, it’s going to be driven by pricing with partners. And going back to your earlier question on Blackstone, clearly we do need to engage, and we are obviously always engaged with our partners looking over their portfolio. But there is a partner involved on when they choose to execute on dispositions. With regards to paying down low coupon debt, I just want to highlight that next year we do have 9.625% paper. I wouldn’t consider that low coupon for us. And I think we will be paying that down. So that significantly reduces the FFO dilution from any net dispositions. But I do believe as we focus on appropriate risk profile, paying down some element of debt with EBITDA growth will lower debt-to-EBITDA to the range which we are clearly trying to operate in which is a turn lower than where we are today. With regards to G&A, you are right, it’s probably in that low semis. I do think that there is a slight upward revision from that looking at in the future years. You did make a reference to labor cost, but I do think that will come up but it will be lower than what the historical run rate was at DDR.

And the next question is from Chris Lucas of Capital One Securities.

Going back to the Blackstone partnership, I guess I was trying to understand, maybe you could give us some color on the dynamics underlying that and your options as it relates to the ROFO on the 10 assets and when you thought the term of that optionality would be. Is that something that is still many years out or is that something that’s going to be something that you guys are going to be looking to execute on over the next year or two?

Chris, with regard to the dynamic, I think the relationship remains very good. We continue to review transactions, new transactions and new investment opportunities with Blackstone but they have acknowledged and we have acknowledged that our portfolio and our focus on the quality of the real estate may some opportunities don’t fit our long-term strategy. With regard to the third joint venture, we do have a ROFO right of first offer on 10 of the assets which make up a considerable amount of the value of the portfolio. With regard to timing on that, it’s clearly going to be dependent on when we feel it’s appropriate for our cost of capital but also it’s up to when Blackstone deem that they want to exit and feel that they have the made returns that they warrant. So, they are investors. So, I do feel where we sit today, we are in a very good position to be able to acquiring a number of the assets that we feel would fit very well in our platform. And I don’t want to remind everyone that when we do that obviously the underwriting is extremely and we have de-risked that portfolio and the knowledge of the assets help us on reinvesting the capital. But right now, I would say it’s a few years out. Although the portfolio was acquired at an extremely attractive price looking at today’s market, the assets we sell which is the bottom tier is 20% above what we felt we acquired it for. We do feel like there is some additional portfolio pruning to do with Blackstone before we feel it makes sense to take Blackstone out.

And this concludes our question-and-answer session. And the conference is also now concluded. Thank you for attending today’s presentation. You may now disconnect.