SITE Centers Corp. (SITC) Q2 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the DDR Corporation's Second Quarter 2017 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 Brandon Day-Anderson, Head of Investor Relations. Please go ahead.

Good morning and thank you for joining us. On today's call, you will hear from President and CEO, David Lukes, Executive Vice President and Chief Operating Officer, Michael Makinen; and Executive Vice President, Chief Financial Officer and Treasurer, Matthew Ostrower. Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumption, 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 releases issued today and the documents that we filed with the SEC, including our Form 10-K for the year ended December 31, 2016. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, operating FFO, and same-store net operating income. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release issued today. This release and our quarterly financial supplement are available on our website at ddr.com. For those of you on the phone, who would like to follow along during today's presentation please visit the event section of our Investor Relations Page and sign into the earnings webcast. At this time, it is my pleasure to introduce our President and Chief Executive Officer, David Lukes.

Thank you, Brandon. Good morning and thank you all for joining our second quarter 2017 conference call. I'd like to invite everyone listening to join the Events & Presentation section within the Investors portion of our website to follow along with the slide we provided for this presentation. A copy of these slides will remain available on the presentation section of our website following completion of the call today. We've got quite a bit of content to review with you this morning. First we will provide an overview of our second quarter results including our leasing outlook. And then we'll quickly move into a variety of topics related to our repositioning process. We will review the major milestones we've hit so far, highlight some key changes to our balance sheet and guidance, and then review the conclusions of our in depth portfolio review with an eye towards providing some guidance around disposition volumes, the portfolio repositioning process, and our ultimate asset mix. Turning to the second quarter itself, operating FFO of $0.30 per share was ahead of our budget primarily because of lower than expected G&A expense, asset sales timing, and better than expected same-store net operating income. The positive variance in NOI relative to our internal budget was a result primarily of timing related items including earlier than expected rent commitments, several ancillary income items and a favorable co-tenancy resolution. In addition to these non-recurring items, results from Puerto Rico were above budget and bad debt expense was generally lower than expected. We highlighted in last quarter's call that we expected the second quarter to represent the weakest growth rate of 2017 because of the cumulative impact, this quarter of vacancies Sports Authority, hhgregg and Golfsmith bankruptcies. However because of the timing of the factors mentioned, we now expect the trough to occur in the second half of this year. Matt will comment in greater detail on this topic, but despite the change in 2017 same-store NOI cadence we remained very comfortable with our original full-year same-store NOI guidance range. Additionally, without diminishing the importance of contraction in same-store NOI, Mike will review a variety of ways in which we believe we're seeing a return of operating momentum to the same-store portfolio which represents over 90% of our share of the NOI. I'll now hand the call over to Mike to review our operating performance in greater depth.

Thank you, David. We will never be satisfied with the contraction in same-store net operating income, but behind the negative growth, there are a variety of metrics that point to improved future NOI performance. First, the highlight of the quarter was leasing activity. Our volume with new lease in this quarter including pro-rata share of joint ventures was 410,000 square feet at 1,629 per foot with new lease spreads of 10%. We also made substantial progress on a redevelopment pipeline this quarter with leases signed with First Time Market, NCR Trading Post at our Westlake Plaza Redevelopment here in Cleveland. And we remain on track to open Puerto Rico’s first Dave & Buster's at Plaza del Sol year end which we expect to be a significant draw on the island. These strong overall results suggest that while we may have experienced an increase in tenant bankruptcies and store closures, demand for space in our portfolio remains high enough to produce strong releasing volumes. Diving into these metrics, you'll see that while new and releasing spreads were within historical norms, the CapEx associated with new leases has risen. This is the result of releasing of anchor spaces especially those resulting from recent tenant bankruptcies. Now well some quarters will be better than others, it would be normal for leasing CapEx to be elevated and net effective rents to be somewhat lower as we recover from bankruptcy related anchor vacancies. Importantly, shop economics remained attractive this quarter with CapEx and net effective rents in line with historical trends. As David mentioned, the decline in same-store NOI was largely a result of store closures generated by significant tenant bankruptcies. This same phenomenon caused our quarter end lease rate to decline 60 basis points sequentially to 93.7 primarily as a result of hhgregg closures this quarter. We continue to expect the lease rates to trough in the third quarter. Our leasing pipeline remains robust specifically across the aggregate portfolio; we have 280,000 square feet of anchor leases and 240,000 square feet of shop leases currently in negotiation suggesting we should be able to sustain this historically high level of leasing activity reported in the first six months of the year. All of this momentum has translated into measurable progress on refilling vacancies created by Sports Authority, hhgregg, and Golfsmith with eight new leases and LOIs completed in the second quarter. In order to sustain this momentum, we have launched an initiative to redouble our focus on vacant shop space which we believe represents a $40 million NOI opportunity in this portfolio. We are expanding our leasing team and spending significantly more management time in this area. Demand for all of the space may see surprising in the current environment but it is not when considering our high exposure to tenants benefiting from the shift of the American consumer to discount oriented merchandise. This means that we're seeing deals not just with the usual suspects in this category, T.J. Maxx, Ross, and Burlington but newer and more quickly growing discount and specialty entrants like Aldi and Leedle, Totaline, Fresh Time, Hobby Lobby and Alta. We also executed two leases with Dick's Sporting Goods in Evansville, Indiana, and West Long Branch, New Jersey. With that, I would like to hand the call back to David, who will review some of our milestones today.

Thanks Mike. I'll now review with you some of our key achievements over the past five months. Our first month was focused on ensuring we had the right number of people in the right positions and the result was not just a significant cut to our G&A budget and reduction of overall staffing, but also the promotion of some of the strongest existing members of the DDR team. We remain highly focused on corporate costs especially those not specifically associated with headcount. We then turned our attention squarely on the balance sheet. Last quarter, we highlighted a significant work we could do ahead of dispositions to reduce maturity risk and we have since made progress on this front. Specifically, the $450 million 10-year bond and a $175 million perpetual preferred offerings that we executed in May and June resulted in a balance sheet that is much better positioned for capital markets volatility. Matt will provide more color on this momentarily. With our debt offerings completed, we continue to focus on the portfolio review process and executing on existing key transactions. I'd like to highlight our key accomplishments in this area. First, we closed on the restructuring of the DDRM or Manatee joint venture. This transaction resulted in a variety of benefits including demonstrating strong pricing for a key DDR portfolio, accessing attractively priced CMBS capital for a large retail portfolio, and demonstrating the sustainability of profitable and strategically valuable joint venture fees. We've also joined forces with Madison International, a highly sophisticated partner for the portfolio with whom we look forward to a long and productive relationship. Second, we closed over $200 million of dispositions in the quarter at a sub-8% cap rate pushing net debt-to-EBITDA down to 6.5 times from 7.0 times and demonstrating that the markets for retail assets including power centers remains active. We closed an additional $115 million of dispositions since quarter end as detailed in our supplemental including a $90 million portfolio in our Blackstone joint venture and are in negotiations on additional assets. We remain optimistic about our ability to transact given the quality of assets in our disposition pipeline. Third, included in the second quarter dispositions, were two assets in Puerto Rico that we sold for a combined $57 million at a low 8% cap rate. This transaction allows us to continue to manage our exposure to the island in the phase of domestic dispositions and demonstrates that there are avenues for reasonable transactions on the island. As I said on our first quarter call, we are not a distressed seller and double-digit cap rates for the remaining even higher quality portion of the portfolio is simply not realistic. We will continue to manage our Puerto Rico exposure in a thoughtful manner that protects our shareholders value. Finally and most importantly, we finalized our portfolio review, we now have not just a complete list of the assets we'd like to sell in the deleveraging process but a list we believe is saleable at attractive prices in today's environment. We expect to raise roughly $900 million of pro rata proceeds asset sales from April 2017 through mid next year, including $200 million that closed in the second quarter. We expect the end result of this process will be a reduction in our debt levels to about six times debt-to-EBITDA on a pro rata basis. I will return to our findings from this process in just a moment but first I'll hand the call over to Matt to review the changes in the balance sheet as well as some thoughts around sources and uses over the next year.

Thanks David. We've made some noteworthy progress on the balance sheet in the last several months but have plans for further improvement or such on those in order. In terms of what we've gotten done, the financings we completed in May and June accomplish several goals, first our 10-year bond in preferred equity transactions demonstrate DDR's access to capital at attractive prices. Second and perhaps more important it serves to de-risk the balance sheet. We moved from a position of having too much debt maturing in the near-term to being able to absorb three years of maturities without needing further access to the capital markets even in the absence of additional assets sales. Finally, we increased our average debt at preferred duration from being one of the shortest in the sector to one of the longest at nearly eight years including preferreds. Looking forward, completion of our planned dispositions would position us to have one of the best balance sheets in a shopping center REIT space. Debt-to-EBITDA on a look through basis would end up just below six times, a more modest level on a year or two ago and in line with the peers. But we would have other differentiating changes as well including virtually no consolidated secured debt among the lowest level of bank debt exposure and average debt duration among the highest in the peer group and no significant maturities for over three years. The planned repayments of 2017 and 2018 mortgage debt should unencumber over $550 million of gross book value and eliminate mortgages with a 19% average debt yield. We've got a lot of wood to chop on the dispositions front but if we succeed, our balance sheet will be very well positioned to allow the company to take advantage of investment opportunities. I'd like to now turn from the balance sheet to 2017 guidance, which we are leaving unchanged despite stronger than expected second quarter results. On same-store NOI, we are leaving guidance unchanged largely because of a range of offsetting factors. First our NOI outperformance in the second quarter was attributable primarily to several timing-related factors including one earlier than expected rent commencements; two, favorable ancillary income results; and three a favorable one-time co-tenancy resolution. There were also some more sustainable sources of the positive variance including generally better than expected results from Puerto Rico and lower than expected bad debt expense. Offsetting the generally positive impact of second quarter numbers are several smaller tenant bankruptcies that occurred following our last conference call in April including Gordmans, Vestas, and Gander Mountain. A third factor that will likely impact annual same-store NOI performance is our ongoing dispositions process. We have several asset on the market that we recently finished releasing and therefore have higher 2017 NOI growth rates. While the decision to sell these properties is the right long-term decision for DDR, the exclusion of these assets from the same-store pool when they are disposed could negatively impact our reported annual same-store NOI growth. Summing up, we remain extremely comfortable with our guidance range, but we also expect our growth rate to trough in the second half of the year rather than in the second quarter previously. I'd like to also point out three modeling items. At quarter end, we had $414 million of cash on the balance sheet and $61 million of restricted cash. $310 of this cash was used to retire the April 2018 bonds in the second week of July and we will retire all of our remaining 2017 maturities $126 million of mortgage debt with the balance of the cash at first week of August. Additionally, as part of the April 2018 bond redemption, we paid make-hold charge of $7 million which we will recognize in the third quarter. Lastly included in the quarter was $1 million of base rent from bankrupt tenants that we will not receive in the third quarter. And finally, before handing the call back to David to discuss the completion of our portfolio review process, I'd like to touch briefly on sources and uses for the next four quarters. We expect to achieve our target six times debt-to-EBITDA goal by raising $900 million of pro-rata proceeds from dispositions including $200 million that closed in the second quarter. We intend to use proceeds from these sales to repay mortgage debt maturing in the next two years, the $200 million secured term loan outstanding, $200 million of the $400 million unsecured term loan, $82 million of unsecured bonds maturing in 2018, and $100 million of additional mortgage debt. While there will be a cost to shareholders from this activity to benefit is a much better balance sheet positioning DDR for future growth. This analysis does not factor in proceeds from the redemption of any Blackstone preferred. We view disposition proceeds and Blackstone preferred proceeds as interchangeable. Should combine proceeds exceed our de-leveraging goals, we would expect to reinvest excess capital. I would like to now hand the call over to David for a summary of findings from the portfolio review process.

Thank you, Matt. I'll take a few minutes to describe the results of our portfolio review process which we began discussing last quarter as well as what this means for our dispositions and capital allocation decision making going forward. As I said to you last quarter, we view each property like most investors view any investment they're making which means understanding the cash flow growth profile and the risk associated with achieving that growth, we are highly reliant on factors like location, site, and rent roll, and we are much less focused on the property MSA, the average base rent per square foot or specific retail format. These considerations can be broken down into specific qualitative and quantitative factors. On the quantitative side, we focus on the consumer within the assets specific trade area to measure four factors: number one, the spending power; number two, the gap between the centers in place rent and market rent; number three, the number of trips that consumers make to the center to measure its ability to attract convenience type tenants; and number four, the density of the asset or the SAR to measure site efficiency. On the qualitative side, we gauge the attractiveness of the intersection on which the asset is located. The assets visibility, the layout of the center, and of course the properties merchandise mix, which is an enormous factor in determining the assets consumer drawing power. Assets that screen well on these qualitative and quantitative aspects are those that are candidates for being part of the DDR portfolio over the long-term. With the assessments now complete, we can much better understand how the portfolio fits into the three buckets. We discussed in the first quarter call durable, growth and redevelopment. We believe roughly 66% of our NOI falls into the durable category which we see as assets with stable cash flows but more modest upside. These assets include our portfolio of ground leases and single-tenant assets, a wide range of more convenience oriented properties and perhaps the largest group, those assets that represent dominant locations and that offer very low occupancy cost ratios to their tenants. Our dispositions fall almost entirely into this durable category with a very few exceptions, we are selling them not because we believe they're risky but because of our de-leveraging goal. We will however use the de-leveraging process to sell lower growth rate assets and improve the impact of the higher growth assets we intend to keep. Roughly a quarter of the NOI fits into the growth category. These are properties that we believe have some financial upside because they're currently under serving their three mile trade areas that have an opportunity for profitable re-tenanting with high productivity merchants and those with recent box vacancies that we believe can be filled at an attractive mark-to-market rent. And finally, we believe about 10% of the portfolio falls into the third redevelopment bucket that we described last quarter. These assets should have the highest growth rates because they present significant densification opportunities significantly below market rents or an opportunity to optimize their overall formats. Just to make it a bit clear, how we're screening and making these decisions on assets. I'll review an example in each category. When we state that 66% of our NOI falls into the durable category, it's fair for investors to ask exactly what gives the confidence in the security of these cash flows in a challenging retail atmosphere especially in non-gateway markets. Polaris Towne Center in Columbus, Ohio, is a great case study. The Aerial photograph shows that the center has high visibility a long and simple layout and a convenient shallow parking field with multiple access points. The tenant roster includes a Kroger grocery store on one end, Lowe's and Target on the other and a strong collection of junior anchors and shops in between with well located pad buildings along the main access road, convenience, cross shopping, and visibility are the key ingredients for strong tenant sales. This is a great qualitative set up for the quantitative analysis which is primarily about rents and sales numbers and how they support the stability of the landlord's economics, so here are the numbers, Kroger's has a low-single-digit rent and an occupancy cost ratio of just 1.7% but their low rent is also flat for the next 21 years. Durable low anchor rents means economics must come from elsewhere and in this case it's the junior anchors and shops. Like several other junior anchors here, TJX has very high sales and a low 3.5% occupancy cost ratio. This sets us up for some strong shop rents which are indeed 130% higher than the junior anchors. But this high rent is also a product of shop scarcity only 20% of the center space is not anchored. This all means strong but limited shop economics. A near term OfficeMax expiration with a large mark-to-market rent opportunity even provides upside within the junior anchor category. And finally over $700,000 of NOI is coming from ground leases on single-tenant pads which carry an inherently low cap rate and tend to be stable below growth. Summing this up at 99% occupied, Polaris is a very high quality but also low growth property. Growth assets have similar qualitative factors but more financial upside. Consider Tanasbourne Town Center in Portland, Oregon, again exceptional location and visibility along with easy access and convenient site circulation, a strong anchor base of Nordstrom Rack, Target, Ulta Cosmetics, and Ross, generate strong consumer demand and traffic. You're going to note a scarcity theme with shops in our DDR presentations and this site is no different with only 20% of the GLA allocated to shops, the shop rents are 180% higher than the anchors. This property fits into our growth portfolio because we've recently executed leases to de-box and backfill a vacant Hagen, so the NOI growth here will be above average over the next year or two as occupancy rises back to 99% and new rents commence mid next year. This case study also demonstrates that DDR's high leasing volumes have been associated with good inventory in great properties made available through tenant bankruptcies. Speaking of the best real estate about 10% of our NOI comes from properties that we see as a yielding land place with greater densities in their future. A sneak preview of one such asset is Sandy Plains village just outside of Atlanta, Georgia, in Roswell. The property’s ugly appearance and anchor vacancy make it easy to overlook but surrounding demographics are strong and the site is one of the few open air and low density properties in an otherwise wealthy residential community. We have a strong movie theater with low occupancy cost many of our shops roll lease terms with no options in the next few years and the anchor vacancy is actually a dark and pain Wal-Mart that controls over 30% of the land, these are all great ingredients for redevelopment potential. Our executive team spent a day on the site a few weeks ago with our Atlanta office and we're all excited about the possibilities. Before we take questions, I want to briefly discuss our dispositions program. Previous management at DDR did an excellent job disposing of risky assets and you can see we made further progress this quarter paring back the portfolio. We're working hard on leasing. We're making progress on asset sales, our capital allocation is firmly geared towards de-leveraging and the portfolio review process has given us more clarity on our future growth. And with that, I'll turn the call over to the operator for questions.

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Todd Thomas of KeyBanc Capital Markets. Please go ahead.

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

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

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

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

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

Okay. And then just lastly, so the lease rate for the portfolio is expected to come in from the 93.7% at June 30. Do you have any sense I’m just trying to understand whether the bottoms in the third quarter and begins trending higher into year-end with a view in the 2018 or do you think that we continue to see the portfolios lease rate trend lower from 3Q into 4Q?

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

The next question comes from Christian McElroy of Citigroup. Please go ahead.

Just in the context of the portfolio review and asset sell plans of the $900 million that we should expect over the next year including Q2, we obviously know the breakout of the first $200 million but of the remaining given that you've sort of completed the review, can you talk about how much of that you expect will be in Puerto Rico versus the U.S. and how much of that could potentially be your share of sales in the Blackstone JV?

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

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

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

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

The next question comes from Craig Schmidt of Bank of America. Please go ahead.

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

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

Okay. And then do you see the activity in the limited small shops that yes the portfolio has improving by the trend of the end of the year.

I'm sorry did you say improving by.

Just the rate of least spreads and occupancy in the small shops.

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

And quite just a circle back to your previous question do you want to --?

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

The next question comes from Steve Sakwa from Evercore ISI. Please go ahead.

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

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

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

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

But we are we are in negotiations on properties today Steve with riding through -- with the right levels of progress there whether it's you know purchase and sale agreement or otherwise. We definitely there is a pipeline of ongoing like it's going to kick off as of today.

I guess my question was this all $700 million of that currently being marketed and it would close over the next call it 9 to 12 months is that.

I wouldn't say the entire $700 million is currently in the market it as you know this is a kind of a -- it's a process right so it depends on exactly how you define that. We definitely assess the salability of all of it using brokers et cetera so, if we definitely make progress on the whole thing how far we get an exactly when is -- we're not, not saying it because we're hiding something it's as you know these transactions is very difficult to predict.

Okay and I get.

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

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

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

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

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

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

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

Okay. And the second question David as you mentioned some cost saves outside of, corporate G&A et cetera so are there cost saves in the field whether it's regional offices or maybe more use of third-party brokers or things like that could you just discuss some of those other cost saves beyond the corporate overhead.

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

Is there a number that you would identify?

No.

No.

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

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

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

Okay. I guess maybe a different way, I mean just from a mix perspective I mean once you're done with the dispositions which are largely in the durable bucket, is that likely sustain more mix going forward or does that just depend on the times in the cycle?

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

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

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

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

I was just wondering if you could talk about Ascena obviously they are a decent tenant of yours and large kind of across all of the retail REITs and they recently announced they were going to go through some either foreclosures rent roll downs over the next few years. So just wondering what exposure you had to those leases expiring by mid-2019 and if you started those discussions with them?

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

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

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

Just as a point of clarification, it’s 1.3% of our ADR on a pro-rata basis.

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

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

The next question comes from Jeff Donnelly of Wells Fargo. Please go ahead.

Maybe I will start with you Matt, just thinking about the leverage target of about six times net debt-to-EBITDA. I’m just curious why you determined that level versus say something more in the mid-five or approaching more squarely in the middle around the range for BBB?

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

Thank you for that. And just now the review and plan are complete the end, you maybe have a firmer sense of the major factors that are affecting your future outlook, do you guys expect to return to providing FFO per share guidance and maybe as you move into the back half of 2017?

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

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

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

Maybe asking everyone I mean how do you think about the spread between sort of that A assets and A market sources I just call it B assets and B markets. I think there's been concern that some of the weakness that we've seen in the mall business for example on asset pricing is still going over into the power side of business I'm just curious if you think that there's truth to that or if you think that's maybe a little overblown I mean, maybe you can talk a little bit about some of the pricing you've observed.

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

The next question comes from Richard Hill of Morgan Stanley. Please go ahead.

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

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

Yes. And so no specific trends to say look ones decelerating more than another.

No.

Okay that's helpful.

I don't think so.

All right so, you mentioned some comments about the CMBS market and I think maybe you finance something recently did you see any sort of difference in demand based upon differences in the quality of the portfolio that you were capitalized.

Richard it's Conor. Yes I think the difference in demand was function of fixture floating and term as opposed to the quality for portfolio that we saw as biggest variable we saw.

Thank you. The next question comes from Michael Mueller of J.P. Morgan. Please go ahead.

I just have a quick numbers question. I guess and talking about the second quarter results you mentioned here some non-recurring items in there. I think also Matt you mentioned that $1 million of base rent is not recurring talked about something co-tenancy resolution so if we're just thinking about the Q2 NOI starting point how much do we need to strip out on a go-forward basis to capture all of that.

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

So it sounds like it’s not material anymore.

We break that out in supplemental. You’ll see it we were back to historical levels starting in the third quarter.

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

Thanks. Good morning it’s Ki Bin. Just one last question on Puerto Rico what were some of the reasons why those two assets were more sellable quickly versus the rest of portfolio?

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

Okay and like you mentioned if I look at the average base rent for those assets so it’s fairly a little bit lower than the average rate for in Puerto Rico and so 150 bucks a square foot or so, is there anything that we can any conclusions we draw from that for the remaining assets that are some on a much higher base rent and how we compare that to the 8% cap rate or is there just too many variables.

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

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

Yes.

Okay. End of that quick one the notes receivable and your balance sheet went down anything to note there?

There was one -- the North Ridge that’s one of the transactions listed out on the page as the mezzanine loan payout in the second quarter.

The next question comes from Carol Kemple of Hilliard Lyons. Please go ahead.

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

Yes.

The next question comes from Wes Gooladay of RBC Capital Markets. Please go ahead.

Hey, good morning everyone and your negotiations with tenants where you're getting the most pushback is it the initial rent, is that the contractual bonds the TIs just any color on that.

All the above. Just generally we get pushback on everything but as far as the trend off late and where we're seeing the sensitivity on the tenants, I think it tends to be a balance between the overall rents in the CapEx and making that work for us and work for them.

That’s not a new phenomenon.

There's not new about it but honestly tenants are top particularly the national chains and the Mom & Pops generally are left off.

Okay. So you probably have I guess and we have heard something, some other landlords private landlords that the contractual bumps might have been under a little bit of pressure but not drastic like, some people are thinking but doesn't sound like that's the case.

That is not the case.

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

Hey good morning everyone. Just a couple of quick questions. David on your a portfolio review and as you were lining up the buckets what was the timeframe that you were sort of underwriting as you thought about were the opportunities were in terms of durable growth and redev.

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

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

It was a variety of assets Chris. It wasn't just one asset, Chris I’m sorry once, there was a land parcels well right. Christa that you want.

Sure. This is shopping center which under the accounting rules to for the most part that's a good trigger, that is triggered anytime there's some sort of a change in what you're whole period is so that's just an asset that we're now looking equity in our disposition bucket. And then there was and then also two undeveloped parcels of land which again just some change in assumptions with how the team is looking at what those parcels are what we're going to do there.

Okay. And then David you mentioned that on the Puerto Rico transactions that financing was involved. Just any color you can provide in terms of what the general terms were leverage wise or anything like that as it relates to the financing terms anything?

Definitely not.

Okay. And then just last question on the -- you mentioned that you’ve got – you still see it better sort of give you guidance about it, are you seeing any divert of dispersion widening as it relates to the bids you’re seeing or is it still sort of inconsistent in terms of where bidders are coming in as a group?

Domestically or in Puerto Rico, Chris?

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

Do you mean if they were three bidders, are they widening out from each other is that what you mean or you mean?

So if you had sort of the normal bidding process had been say you’re getting three to five bids and there was a core less the rent -- there's generally core less with one outlier that’s the winner or is that dispersion getting is that or change the dispersion or how the bidding is are you getting more low bids, just give me a sense as just sort of how consistent is the bidding been?

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

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

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