SITE Centers Corp. (SITC) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon, and welcome to DDR Corp's First Quarter 2018 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'd now like to turn the conference over to Brandon Day-Anderson. Please go ahead.

Good evening and thank you for joining us. On today's call, you will hear from President and Chief Executive Officer, David Lukes; Executive Vice President and Chief Operating Officer, Michael Makinen; and Executive Vice President, Chief Financial Officer, and Treasurer, Matthew Ostrower. Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand these statements are subject to risks and uncertainties and actual results may differ materially from forward-looking statements. Additional information about such risks and uncertainties that could cause actual results to differ may be found in the press release issued today and the documents that we filed with the SEC, including our Form 10-K for the year-ended December 31, 2017. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, operating FFO, and same-store net operating income. 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 www.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 call webcast. At this time, it's my pleasure to introduce our President and Chief Executive Officer, David Lukes.

Good evening and thanks very much for joining our first quarter earnings call. Last quarter, I highlighted three key areas of focus, namely, our return to growth, our balance sheet transformation and substantial leasing opportunities embedded in our portfolio. Our 1Q results provide evidence of progress on all three of these fronts. First, the RVI spin remains on track, moving us closer to the end of the dilutive, deleveraging process. Second, New DDR posted compelling leasing economics and strong same store NOI growth, despite tenant bankruptcies. Finally and most importantly, New DDR's curated portfolio is allowing us to assemble a value accretive redevelopment pipeline. Now on to the business of the call. I'll review our results and then provide an update on growing redevelopment opportunities and recent DDR transaction activity. I'll then hand the call over to Mike for comments on operations and we'll close with some comments from Matt on the balance sheet, RVI and guidance. Operating FFO in 1Q was $0.03 ahead of our budget but down from last year as dilution from deleveraging weight on earnings. As I mentioned, we expect this headwind to end in 2018. Operationally, the first quarter demonstrates the high quality of our real estate and sustainable tenant demand was solid leasing economics within the new DDR portfolio highlighted by 21% new leasing spreads and 2.6% same store NOI growth. This positive momentum was driven by rent commencements on a range of previously vacant anchor spaces and continued small shop leasing progress. These results are solid by any measure and we're ahead of our internal expectations. Result including the RVI, continental U.S. assets weren't bad either with 1.5% same store NOI growth. Overall, our portfolio clearly performed well this quarter, despite difficult occupancy comparisons. Going forward, the Toys bankruptcy generates some challenges in the form of additional vacancy, but the headwinds will be partially mitigated by the backfill of vacant space and continued small shop leasing. More importantly, these empty boxes also allow us to recapture control of space and parking field at some of our best assets, facilitating economically attractive redevelopment projects. One of the characteristics that we look for when curating the new DDR portfolio with land use efficiency. In other words, we favor properties with a strong likelihood of increasing in value as current tenants expire or lose their lease control. Control is the key feature that allowed us this quarter to move forward with three new redevelopment projects, which are now listed in our supplemental. In Brandon, Florida KMart controlled 100% of the common area and 58% of the site GLA through their long term lease. We purchased a terminations controlled now the well located site and have zero current direct exposure to Sears or K-Mart in the new DDR portfolio. At Sandy Plains village in the Atlanta MSA, we purchased a termination of Wal-Mart, which controlled 60% of the coming area and 34% of the GLA. We now control over half of this site within a high income neighborhood. At Shoppers World in Framingham, Massachusetts, we've been holding certain spaces vacant and renegotiating clauses within others existing leases in order to facilitate a new site master plan. The last critical check piece fell into place when Babies “R” Us liquidated and we now have control of a meaningful redevelopment zone. All three of these locations are in active dial with zoning and planning departments and it progressed well over the course of the last nine months. In the coming quarter or two, we hope to be in a better position to share our detailed plans for the properties as well as pre-leasing progress. But I had to say we are increasingly excited about the retenanting and densification opportunities on these well located sites which will become a larger part of our story in the future. Shifting to transactions. We closed in the sale of our first RVI asset last week. Specifically, we sold Silver Spring Square in Harrisburg, Pennsylvania for $81 million to an institutional buyer at better economics then transactions closed to date. This is a solid beginning to the RVI disposition process. We're making progress on additional transactions and will provide more information on RVI asset sales as they occur. We're also though continue to execute on our original $900 million disposition program selling over $370 million of assets in the first quarter at a blended cap rate of about 7.4% and closed an additional $189 million subsequent to quarter end. First quarter transactions included the first portfolio deal we've done in some time, the sale of nine public anchor centers in our Madison joint venture to Publix as part of the retailers' initiative to increase ownership of centers in which it operates. As our disposition volume for the last year indicates, our top tier transactions team continues to execute at a breakneck pace. Asset level debt markets are open, private market buyers are active, and our recent activity gives us confidence in our ability to execute. Before handing the call over to Mike, I'd like to close by restating how excited our whole team is with our impending shift from a capital allocation strategy focused exclusively on deleveraging to one focused on redevelopment and opportunistic investing. All of which is supported by a curated portfolio of asset with outstanding locations. The incredibly dynamic retail environment in which we find ourselves certainly provides its share of challenges. But I strongly believe it increasingly provides opportunities for profit as well, opportunities we intend to pursue tirelessly. We are eager to share our thoughts in this environment and our business strategy something we intend to do in detail at an Investor Day we will be hosting in New York City on the 11 September. Please keep your eyes peeled for a Save the Date with more details in your inbox shortly. And with that I'll turn it over to Mike to review some key operating conclusions.

Thank you, David. I'll start by summarizing the three key operational takeaways. One, same store NOI growth in the continental U.S. was strong. Two, leasing spreads were robust. And three, Puerto Rican operations were better than expected. On same store NOI, as David mentioned, first quarter growth for the New DDR portfolio was 2.6% which was ahead of our budget. Results were fueled by ongoing progress refilling box vacancies, as well as commencement of rent from the greater volume of small shop leases we began signing six months ago. Second, in the continental U.S. we continue to make steady progress on the leasing front. Importantly, New DDR's occupancy was flat overall compared to last quarter and our small shop leasing program remains in focus. Total leasing volumes for all spaces were roughly in line with the trailing 12 month average and blended New DDR leasing spreads were nearly 9% roughly in line with last quarter. Refilling Toys boxes will require some CapEx, but given the mark-to-market and redevelopment opportunities David mentioned, we believe the returns on this capital will be attractive. On Toys “R” Us, We now have two boxes rejected in the bankruptcy process that have closed. Two additional stores with assumed leases and one space that we recently purchased. While we do not yet have timing specifics on the other 16 leases, we have budgeted the balance to close within the next month or so. In terms of overall operating environment, conditions remain generally unchanged, tenant demand remains steady and the quality of New DDR's assets it's high now that our properties remained highly sought after by all the expanding tenants with whom we do business. We have so far seen minimal impact to supply demand dynamics from the Toys liquidation announcement. In Puerto Rico, first quarter operations were steady versus the fourth quarter. Good evidence of the resilience of our assets. We continue to make strides operationally, especially on repairing damage spaces and keeping our centers well occupied. I mentioned last quarter that we opened the island's first Dave and Busters location at Plaza del Sol and we now have feedback indicating that this opening was the change strongest ever. I am pleased to report that our Plaza Palma Real shopping center which incurred the most damage in the hurricane had a grand reopening of its Wal-Mart anchor just last week with traffic consistent with a typical Black Friday. The recovery story is compelling and we're seeing positive sales accounts key national anchors like Wal-Mart and Home Depot. Our least rate fell approximately 250 basis points since the fourth quarter, a product primarily of the closure of our only Toys “R” Us box on the island. Rent on that space was in the low single digits, limiting the NOI impact of the closure. In all, I'd say that despite challenges, Puerto Rico is doing much better than many would think. I'd like to extend a huge thank you to our construction and property management team based both on the island and in the continental U.S. for their help with the work today. With that I'll hand the call over to Matt.

Thanks Mike. I'd like to make some comments on our balance sheet and then provide some color on guidance and RVI before handing the call back over to the operator for questions. First on the balance sheet. We continue to target pro rata net debt-to-EBITDA of roughly six times by the end of 2018. It takes time to lower leverage, so we've aggressively addressed our maturity structure as a way of lowering risk in the interim. As a result of both our 2017 bond financings and the tender offer associated with the RVI mortgage, New DDR's pro forma average debt maturity of 6.3 years excluding the RVI mortgage is now among the highest in the peer group. Pro forma for RVI and dispositions, we have only $179 million of debt or less than 10% of our debt outstanding maturing prior to 2022. Debt-to-EBITDA increased modestly from 4Q, despite additional assets sales. This was a product of the full quarter EBITDA impact of the high volume of late 4Q disposition, as well as the $56 million of debt extinguishment costs incurred in the quarter related to mortgage repayments and the unsecured bond tender. Likewise, our secured debt ratio rose this quarter, which was a product of the $1.35 billion RVI mortgage loan and the repayment of unsecured debt. We expect all of our bond and leverage metrics to improve in the back half of the year when RVI and its mortgage are spun and we complete the core DDR disposition program. Included in our transaction activity disclosure is an additional $36 million repayment of preferred securities associated with our two Blackstone joint ventures. As a reminder, we established a valuation reserve for these securities roughly a year ago, cutting value by $76 million to $270 million. Since then we have achieved key sales threshold levels at both joint ventures allowing us to receive approximately 50% of equity proceeds from asset sales going forward. We recognize a current 6.5% yield on the preferred securities, so every dollar we get back is the earnings equivalent of an asset sale at a 6.5% cap rate. The ventures have sold the total 38 of the 82 original assets as of March 31, generating total preferred repayment to us of $91 million. We marked all Blackstone assets to market each quarter, resulting in a $15 million preferred valuation increase in the third quarter of 2017 and $4 million decrease this quarter. We're making great progress selling assets, reducing our investment in those JVs and lowering DDR's leverage as a result. I'd like to draw your attention to some changes we've made to our redevelopment disclosure on Page 16 of our supplement. We renamed the minor redevelopment category tactical redevelopment and have taken a more conservative approach to the projects listed in this category. Projects we removed will now appear in our recurring a leasing capital expenditures that we report each quarter. What's left in the tactical category are smaller redevelopments, generally in the $2 million to $3 million range including first generation space, expansions and out parcel development. A final earnings housekeeping item worth mentioning is some of the ongoing accounting associated with Puerto Rico. We received and recognized an advance of our business interruption insurance of $2 million this quarter. This is lower than the $8.5 million we received in the fourth quarter of 2017. The smaller BI advance this quarter represents good evidence of tenant reopening and rent payment as we continue to recover from the hurricane. In the case of both payments, the advance represents only a portion of the ultimate BI compensation we expect to receive for those time periods. With a return of normal fee to our assets, we expect these payments to remain at lower levels. Our current estimate of total cost, excluding business interruption remains approximately $150 million consistent with last quarter. We continue to work with our insurer to reach agreement on a final thing amount and settlement. I'd like to now touch on a few comments on our projections. Looking ahead to the second quarter of 2018 results, I'd like to flag a couple of items. First, we expect the second quarter to mark the weakest same store NOI growth rate of the year, largely because we start to feel the brunt of the Toys closures ahead of the expected rent commencement of released former hhgregg and forethought the lease spaces later this year. Likewise, OFFO per share should decline sequentially in the second quarter, largely a product of a full quarter impact of the higher interest rate of the higher interest expense associated with the $1.35 billion RVI mortgage loan for an entire quarter, as well as lower JV fee income and NOIs and dispositions. On RVI fees, additional asset sales could adversely impact the property and asset management fee guidance of $10 million that we outlined last quarter. That said, timing of sales is inherently unpredictable, so we are not revising guidance for those items. As we mentioned previously, we've remained highly focused on our DDR expense structure and have made adjustments, so that any decline in fees will likely be offset. Lastly, our key 2018 earnings assumptions and guidance is unchanged, including the expectation that we will achieve at least 1.5% same store NOI growth and operating FFO per share of at least $0.15 in the third quarter, which is based on the assumption that the spin of RVI occurs in early July. We had anticipated a potential Toys liquidation when we first provided our forecast last year, so this outcome is not sufficient for us to change our NOI growth expectations. Turning to the spin of RVI, we remain on track for a mid-2018 effective date. The loan securitization process is now complete, locking in a rate of LIBOR plus of 315 basis points. Given the current market uncertainty, I am thrilled that we achieved an all-in rate of about 5% on this $1.35 billion deal. We are going through the requisite registration process with the SEC hopefully putting us on track to consummate the spin-off in early July. The closing and securitization of the RVI mortgage loan represented the last major hurdle to the spin of these assets. With that I would like to turn the call over to the operator for your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Bilerman with Citi. Please go ahead.

Yeah it's Christy here for Michael. Hey guys, just we've been hearing about some recently offered DDR, just maybe you could provide some color on that what departments within the organization were most impacted and were these anticipated in the context of the prior G&A forecast?

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

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

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

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

Okay. Thanks so much, guys.

Our next question comes from Ki Bin Kim with SunTrust. Please go ahead.

Thanks. Actually follow-up on Christy's question. Has employee more overall at DDR and I know you guys when you were at every one change some of the KPIs and how people were structured and compensated for different things, any comments on that?

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

Okay. So no major changes on how people are measured on leasing or anything major?

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

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

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

Okay. Thanks.

Our next question comes from Todd Thomas with KeyBanc. Please go ahead.

Hi, thanks, good afternoon. Just I was wondering if you could just comment a little bit on the disposition pipeline for RVI assets, now that those assets are on the market, maybe just some color around the level of interest you're seeing for those assets both the domestic portfolio and also Puerto Rico?

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

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

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

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

We absolutely are interested and intrigued by acquiring more of toys boxes within our New DDR refined useful for redevelopment, but I can't give you an expression to how many.

Okay. Thank you.

Our next question comes from Rich Hill with Morgan Stanley. Please go ahead.

Hey, good afternoon, guys. I just want to go back to maybe some of your prepared comments. If I understood it correctly, toys liquidation was anticipated in your guidance, I think that was referring to the 1.5% same store NOI for New DDR. You put up a pretty decent number for New DDR this quarter of I think around 26 or so. So how should we think about that for the rest of the year? I mean why not raise same store NOI guidance at this point given the big number you put up particularly if Toys "R" Us was already baked in?

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

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

Let me just be clear on what we have in the market, just to make sure that there's clarity. Certain assets are right for sale when you have leases that options have had exercised for example or we've kind of prep the property for sale. And it takes time to do that. One of the beauties of the RVI business plan and particular CMBS that we have on it, is that it gives us a couple of years execute on a business plan, which means the leasing department, the property management department can all get together and make sure that the properties are well positioned for sale. By doing that, you appeal though a much wider group of institutional buyers and usually the pricing ends up better than if you simply have a transaction dump something on the market. So I feel very good about the pace of dialogue between buyer and seller. We do have a huge inventory on the market right now. But as you can see, we've been selling a couple of $100 million a quarter and it feels like on an individual asset basis, we're getting plenty of dialogue. As the prices come in, we close deals, we'll see over time how it's going to relate to our original projections.

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

Yeah.

Okay. Thank you.

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

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

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

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

Yes.

Okay, Can you quantify?

Not this time.

Okay. And then just the final question is, on auto, he has remained an active supporter of the stock in buying. Are there limitations in his whether as a as a foreign entity or his original agreement with the company that limits how much of the stock he can own or is he sort of free to acquire as much as he wants within the five or fewer rule obvious?

Now there is information you can look how effectively his organization is restricted to a maximum of 29.8%. Right now, if you go on, if you go look under the data that you could see that he is somewhere between 18% and 20% and he's been a strong supporter of the stock. But more than that I would say you know both Alex and his colleague Thomas have been an absolute pleasure and they're heavily focused on the real estate and they share operational ideas. So we're certainly proud to have them between 18% and 20%.

Okay. Thank you, David.

Our next question comes from Vincent Chao with Deutsche Bank. Please go ahead.

Hey, good afternoon, everyone. Just want to go back to the disposition commentary a little bit, it sounds like you need to sell these volumes here and getting pretty good interest on the RVI assets throughout there. Just curious if there's been any change in some of the larger properties we're hearing of you less demand for you know properties greater than say $15 million or so?

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

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

Okay, thanks for that. And then just going back to toys as well, I think last quarter you quantify the impact in the 1.5% has now 70 basis points, you know just given the timing of when the stores were closed. I mean does that seem like that number will be significantly different, just given I think total exposure that 1.9% so about half of your convention there?

Yeah, that's right.

Okay. And then one final one for me. Just on the lease commence spread, I mean we already talked about 2Q being the Max Payne for seems store NOI growth because of toys and head of the openings that are already filled. I guess should we expect 3Q and 4Q openings to be relatively ratable or do you think it will be more 4Q weighted?

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

Okay, thanks.

Our next question comes from George Hoglund with Jefferies. Please go ahead.

Hi Guys. I was just wondering if you could give some color beyond Toys "R" Us or you know store closings, what are your expectations at least from you know some of the larger tenants or some of the tenants you're expecting more boxes back?

This is Mike. I think the general answer to that is that we're very mindful and cognizant of a lot of the speculation that's out there. And two things; number one, we're always focused on those spaces when they're subject tenant that has some concern. But I think from a bigger picture standpoint, I think one of the things that's important to stress is the fact that when we selected our portfolio for New DDR, we really didn't consider the presence or absence of the tenants that are on the risk list if you will, we're really focused on the real estate. And so we feel very confident that if something were to transpire where there were more losses, we've been a good position because of the quality of the real estate. But there's nothing thematic. If you look at kind of you know we do all of our forecasting in budgeting you know space by space, you wouldn't see anything particularly thematic like a slew of boxes from one particular tenant or anything like that, there are one-off that we know about, but there's nothing that you would see that was particularly I think interesting or a long one particular thing.

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

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

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

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

Alright, thanks guys. I appreciate the color.

Our next question comes from Wes Gooladay with RBC Capital Markets. Please go ahead.

Yeah, hi guys. Just want to follow-up on the last question on George asked. What do you expect the overall budget for a car, Lambor work in TIs [ph] to range foreclosure is, and how are some of the large format tennis that just may assume the boxes and.

The first for that question is, the range is so great that it's really impossible to answer in one fell swoop. As far as prospective tenants interested in the boxes, there's a handful out there that's range from large format grocery operators to other national box tenets. Unless you'll notice that we did one assumed by Flannigan in our Princeton asset. So that is a single user of a single large box. So as Mike said, I think it's just too early to know on the CapEx side and what the outcomes are going to be. We are working on it, but there's no easy answer yet. Keep in mind the Babies "R" Us spaces are in the 30,000 foot range, so they're not exactly large boxes, they're more junior boxes., so it's very feasible that those could be single users and some of the toys boxes are larger which are the more likely candidates to be split.

Okay. And then you mentioned a lot about getting control of property, so you do large scale redevelopments, is there any marquee project that you can do maybe in the next two or three years that you could highlight that you're just trying to get control of right now?

I would be so incredibly enthusiastic to highlight that once we actually have control.

Okay.

Look, we already got control in Shoppers World which is fantastic. And that trade area is massive and I think this whole company has looked at Shoppers World probably a decade wishing we could do something and that we have chance. So there is a lot of good news stories that I think the culture here is pretty enthusiastic about and gaining control of a couple of 100,000 square feet of anchor space which basically means a 0.5 million square feet of land is a lot for a company of our size the one quarter. So we've got a great road ahead whether we're successful on winning some of the bids for additional toys boxes, we'll see over the next couple of months.

Okay. And then last one for me. With - how should we think of co-tenancy, is there an issue we need to be concerned about it be a multiple boxes in a center close or is that just not the way it works?

Overall that's not a major concern.

Okay. Thank you.

Our next question comes from Nick Yulico with UBS. Please go ahead.

Oh thanks. Just going to be you give the net effective rent numbers in the supplemental which is helpful, but do you - can we get a feel for what has that - what is the number look like on a like a releasing spread basis?

If you think net affective, I haven't calculated that. We can look into doing that, but I don't have that in my fingertips for you. It's a good question.

Okay. I'm just wondering if it's anywhere close to the releasing spreads that just you site otherwise?

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

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

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

Okay. I appreciate it. Thanks, Matt.

Our next question comes from Vince Tibone with Green Street Advisor. Please go ahead.

Good afternoon. Can you describe how the new anchor vacancies impact the plan disposition that RVI, as sooner there were anchor closes, are you going to try to lease that space before it sale or do you sell on the center with significant big box vacancy, like how do you balance kind of maximizing price versus getting maybe quicker execution on some of these plan dispositions?

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

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

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

That's really helpful. Thanks, that's all I have.

Thank you.

Our next question is a follow-up question from Michael Bilerman with Citi. Please go ahead.

Hi, great good afternoon and thanks for the extra 20 minutes with the sub in later call, so thank you. David, I was wondering if you can provide some updated in terms of new board members for New DDR and where you stand in the process and the timing of those announcements?

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

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

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

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

Yeah, it's a good question. So yes, I think you could do the math and figure out that the JV this quarter at least were negative. It's hard, it's something that we look at, it's hard to generalize Michael, I would say that now if you have a lot of assets that are in JV but you have a lot of different JVs in that overall pool, right and some of those JVs have really, really great assets and some of them have less great assets and without getting into all the details, you'll see some differential performance there. But I think that the negativity there hasn't been longstanding, so I don't think we're expecting that to continue. But you're right, there is some divergence and performance.

Okay. But if you look at the top of the page, excluding Puerto Rico and the commence rate at least on the leasing perspective, it's not that different, so I don't know if there's other things going on. I mean the expenses are playing into part of it, which I'd love to be able to know your recovery rate effectively has gone up pretty dramatically in the company, so trying to understand that differential as didn't know if there was other maybe one time things that were happening because of that differential?

It's not. I would love to be able to point that kind two easy bullets to give you and again I think is maybe we look at but it's not an easy story like that, it's a variety of different pieces.

And nothing on the expense side jumped out of you, you look at these numbers right, the operating expenses down 5%, real estate taxes down 1.5% but your recovery is only down 1%, there wasn't anything in particular there that made this quarter an anomaly?

No, not really.

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

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

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

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

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

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

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

Yeah.

Okay. All right. Thanks.

Our next question comes from Mike Mueller with J.P. Morgan. Please go ahead.

Yeah, hi. Quick question on occupancy, it looks like New DDR is trying to get about 93% leased and 90%-91% occupied. I guess when you just think about that portfolio, what do you think the max is, what can the highest occupancy that you can sustain in that portfolio in the highest lease rate, what's going to run out? And then as a secondary question here, as we're thinking about the next few quarters, Matt you talked a little bit about toys and then boxes leasing up, the hhgregg boxes leasing up a little bit later. Can you point us toward what occupancy should be doing in Q2 and Q3, sequentially should we see a little bit of a dip there and then just pick up in the back half of the year?

Yeah, on your last question, definitely you will see as we feel the toy impact, you will see some impact occupancy. We would expect occupancy to go down to some degree throughout the year as really, really largely over that. And that will be offset to some degree by openings that we have of other stores. But really toys is going to have an impact on the lease rate for sure this year.

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

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

Got it. Okay. Thank you.

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

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