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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, and welcome to DDR Reports Second Quarter 2018 Operating Results 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, 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 our earnings release and in 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 release and our supplemental which is available on our website at www.ddr.com.
For those of you on the phone who would like to follow along 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.
Thank you, Brandon. Good evening and thanks very much for joining our second quarter earnings call. Over the last several quarters, I’ve repeatedly highlighted three key benefits DDR offers to investors, a return to growth through our strategic transformation, significant near term leasing and redevelopment opportunities and dramatic improvement to our balance sheet. I’ll briefly speak to each of these and then comment on our quarterly results.
First, our strategic transformation was clearly the highlight of the quarter with the completion of the spin of RVI. The end product is two distinct companies with two different business plans. RVI will look to realize value through operations and asset sales, leaving DDR with a highly focused portfolio of just 78 wholly-owned assets.
DDR’s portfolio was handpicked to maximize property cash flows and to create value for our stakeholders. 2Q earnings provide a sneak peek and DDR’s near-term leasing opportunities as well. We produced a notable pickup in activity highlighted by several new tenants to the portfolio that Mike will discuss later as well as continued progress on the redevelopment front.
Finally, completion of the spin combined with our capital markets activities of the last year or so provide DDR with a strong, flexible and competitive balance sheet. As I’ve said previously, we will continue to work to lower leverage. But we will be seeking to do so in ways that are more attractive to investors than slow one-off asset sale especially through capital recycling driven EBITDA growth.
Now onto the business of the call. I'll review our results and then provide an update on our recent transaction activity. I’ll then hand the call over to Mike regarding operations and we’ll close with some comments from Matt on the balance sheet and our guidance. Operating FFO in 2Q was $0.03 ahead of our internal expectations, but down sequentially and year-over-year because of dilution from deleveraging.
Upside was driven primarily by a slower than expected Toys "R" Us liquidation process, lower than expected bad debt expense, early rent commencements from a handful of anchor releases and lower-than-expected G&A costs during the quarter.
Operationally, the second quarter demonstrates the high quality of our real estate and sustainable tenant demand, with solid leasing economics and volumes despite our smaller portfolio. Reported same-store NOI growth of 1.4% was as expected lower than the first quarter’s pace, but it was above our internal expectations. Overall, I'm very pleased with our portfolio's performance this quarter.
More importantly, recent recapture of empty boxes provides us control of space and parking field at some of our best assets, facilitating several economically attractive redevelopment projects. Our work on building an economically meaningful and attractive redevelopment pipeline continues and we expect to have much more to say on this topic including locations, volumes and expected economics at our upcoming Investor Day on October 9th in New York.
Moving on to transactions. Because of activity in the quarter, we've now completed our original $900 million disposition program with a blended cap rate of just over 7.3%. Over the last six quarters, we’ve sold over $2 billion of assets, exploiting both demand for well leased assets and healthy debt markets. Mentioning transactions like the spin or billions of dollars of dispositions on a conference call does run the risk of making these achievements look easy. They are not. And we would not have been able to do it without the help of our world-class legal, transactions and funds management teams.
Before handing the call over to Mike, I'd like to close by restating how excited are whole team is with our impending shift from a capital allocation strategy, focused exclusively on deleveraging to one focus on recycling capital and to redevelopment and opportunistic investing. All of which is supported by a curated portfolio of assets with outstanding locations and strong growth profile.
The dynamic retail environment in which we find ourselves today certainly provides its share of challenges. But I strongly believe, it increasingly provides opportunities for profit as well, opportunities we at DDR intent to pursue tirelessly.
And with that, I'll turn it over to Mike for some key points on operations.
Thank you, David. I'll start by commenting on leasing volumes and economics and then provide some additional color on same-store NOI growth and capital expenditures. The quarter was the most productive leasing period wed have since joining DDR, and trailing 12-month new lease spreads and new DDR of over 20%, suggest we're not accepting lower rents achieve these results. The new lease has also represented significant enhancement to merchandise mix with several tenants that are new to our portfolio including Floor & Decor Carolina Pavilion in Charlotte, Kroger's specialty Lucky's Market concept, F45 Fitness at Midtown Miami, and a full price Nike store in the lifestyle center at Winter Garden Village in Orlando.
We also had several notable rents commencement at this quarter including Dick's the consumer center in West long branch New Jersey and three TJX concepts including Marshall, TJ Maxx and Sierra Trading Post at eastern center in Columbus, Ohio. Such high activity levels quarter-after-quarter simply isn’t possible without seamless interaction between our legal, reasoning and construction teams. And these results demonstrate, we've got an outstanding operations organization.
For the second quarter, new DDR saw a 0.6% sequential decline in lease rate compared to March 31, 2018, entirely a result of the rejection of fixed toys and Babies "R" locations and the purchase of the Babies "R" Us lease at Perimter Pointe in Atlanta for redevelopment. We expect our lease rates trough in the third quarter as a remainder of the toys boxes move through the bankruptcy process. Although, we expect ongoing robust leasing activity to offset some of these headwinds, while the tenant bankruptcy environment has clearly had an impact on our leased rate, we are successfully backfilling at an impressive pace.
Switching gears to capital expenditures. We've commenced the comprehensive $9.4 million LED lighting program that will modernize illumination of parking areas at substantially all of our wholly-owned centers. The program will generate both energy and operational savings, improve visibility for our tenants and improve safety for our patrons. Like redevelopment spending, we believe this investment will provide a measurable economic return, but we will nonetheless include these cost in our maintenance CapEx spending disclosure inflating our third quarter and fourth quarter 2018 CapEx numbers.
Thanks to our property management team for their help planning and rolling out this initiative, which is the key elements and our overall sustainability and property operations strategy. I am also pleased to announce a partnership we have formed with Raimo that will allow customers to take rides in self-driving vehicles toeing from the Ahwatukee Foothills Towne Center in Phoenix. The venture is already helping us to better understand how evolving transportation technology will affect the design and usage of our centers.
Finally, on Toys "R" Us of the 12 original stores in the consolidated new DDR portfolio, one has been acquired by a new tenant, one has been acquired by DDR and six were rejected with the remaining four still paying rent. On the JVs one of the five original locations has been rejected and one has been acquired by a new retailer, with the remainder still paying rent at this time. While we do not yet know timing specifics on the remaining leases, we’ve assumed for budgeting purposes that all rent will cease within the next month.
We’ve been making significant progress releasing these boxes and I would say that, our pace on this bankruptcy has been faster than in the last several liquidations. The overall leasing environment remains generally unchanged from a year ago. Tenant demand is steady and the quality of new DDR's assets is strong enough that our properties remain sought after by the expanding tenants with whom we do business. Additionally, we continue to see strong small shop leasing volumes and economics, a product of high demand for those spaces and our renewed focus on this inventory in our portfolio. As a result of our efforts, we’ve seen a 50 basis point increase in new DDR shop lease rate since the first quarter.
With that, I'll hand the call over to Matt.
Thanks Mike. I’ll start with some comments on the balance sheet then touch on some earnings and accounting matters in the quarter and close with some color on guidance before handing the call back for questions.
We continue to target pro rata net debt to EBITDA of roughly six times by the end of 2018, but balance sheet risk is about much more than just overall leverage and we therefore continue to aggressively address our maturity structure. Following our 2017 bond financing and the tender offer associated with the RVI mortgage, new DDR’s pro forma average debt maturity of 6.1 years excluding the RVI mortgage is now among the highest in the peer group. Pro forma for RVI, we’ve only $176 million of debt or less than 10% of debt outstanding maturing prior to 2022.
Debt to EBITDA decreased modestly from last quarter, a product of additional asset sales. Like in the first quarter, our second -- secured debt ratio this quarter remained elevated because of the $1.3 billion RVI mortgage loan and associated repayment of unsecured debt. We continue to expect all of our bond and leverage metrics to improve in the back half of the year when RVI and its mortgage are no longer included in DDR’s financials. We expect our secured debt ratio to be less than 5% by year-end.
I’d like to now comment on several earnings and accounting matters. First included in our transaction activity disclosure this quarter is an additional $10 million repayment of preferred securities associated with the two Blackstone joint ventures. As a reminder, we established a valuation reserve for these securities in the first quarter of 2017, cutting book value by $76 million to $270 million.
Since then, we've achieved key sales threshold levels at both joint ventures, allowing us to receive approximately 50% of equity proceeds from asset sales going forward. We recognize a current 6.5% yield on the preferred securities, so every $1 we get back is the earnings equivalent of an asset sale at a 6.5% cap rate. The Blackstone ventures have just 36 of the 83 original assets remaining as of June 30th with the sales generating total preferred payments -- repayments to us of over $110 million so far.
We marked all Blackstone assets to market each quarter, resulting in a $2 million increase in book value this quarter, which follows a variety of small upward and downward marks over the last several quarters. We’re making great progress selling assets, reducing our investment in those joint ventures, and lowering DDR’s leverage as a result. As investors consider our perspective leverage profile, they should consider the gradual receipt of both the outstanding $228 million of Blackstone preferred as well as the $200 million preferred interest DDR retained in RVI.
Specifically, we estimate that were these securities to be repaid in full today, new DDR’s debt to EBITDA would decline by roughly half a churn. Second on the earnings front, I would like to point out some ongoing noise associated with non-cash rents caused by tenant bankruptcies. The write-off of fair market value of rents in Q2 primarily associated with the Toys and Babies "R" Us liquidation with 3.1 million causing a 4 million decline from last quarter.
Finally, on Puerto Rico, we received and recognized a payment of our business interruption insurance of 3.1 million this quarter slightly lower than last quarter. The ongoing low level of BI payments represents evidence of tenant re-openings and rent payment as we continue to recover from the hurricane. In the case of this and prior payments, the payment represents only a portion of the ultimate VI compensation new DDR expect to receive on account of revenues loss prior to the spin of RVI. With the return of normal fee to these assets, we expect these payments to remain at lower levels.
Our current estimate of total restoration costs excluding business interruption remains approximately a $150 million consistent with last quarter. Other than repair cost and BI losses incurred by DDR prior to the spin, insurance payments will generally be retained by RVI. We continue to work with our insurer to reach agreement on our final payment amount and settlement. Operations in Puerto Rico continue to stabilize with the 10 basis point sequential increase in lease rate as well as improved the cash receipts.
Now a few comments on FFO guidance. First we are pleased with our same-store NOI performance so far this year and are affirming our assumption of at least 1.5% growth for the year, given that were still only at the halfway mark. As Mike mentioned, our same-store NOI projections assumed the rejection of all toys leases within the next month or so. Given the slower pace of Toys “R” Us leased closings, we now expect same-store NOI to trough in the third quarter versus our prior expectations for the second quarter.
We are also maintaining our 3Q OFFO guidance of at least $0.30 per share, which includes $5 million of RVI fees. The expected sequential decline in our OFFO from 2Q to 3Q is attributable to the spin of RVI as lost NOI from RVI properties is only partially offset by RVI management fees and lower interest expense. One change from our guidance bridge that we published at nearly relates to RVI fees.
Specifically, given their transactional nature, we will exclude RVI disposition fees from OFFO and they are therefore excluded from our OFFO guidance as well. As we mentioned last quarter, we expect to have a decline in RVI asset and property management fees resulting from the sale of RVI assets in 2018 should be offset by declines in G&A expense.
With that, I'd like to turn the call over to the operator for your questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Christy McElroy with Citi. Please go ahead.
Matt, just to follow up on some of your common G&A that you just made, I think that your full year G&A guidance was about 70 million presumably that was excluding the separation charges that you incurred in Q2 which are backed out of OFFO, and understanding that there is some movement in that number relating to the -- what's happening with RVI. But maybe you can provide an update there given that the first half results in prior lower run rates and especially since David I think in your comments you made a comment that G&A in the quarter came in a little bit better than expected?
Yes, I mean on G&A, I would say that our guidance -- you're right, our guidance does not include the kind of the onetime stuff that we exclude from OFFO, so it's a recurring G&A numbers, you are correct on that. I will retain that guidance. It did incorporate the changes we made to staffing and structure recently. So, quarter was a little bit lower. There’s a lot of timing differences in there. So, we’re retaining the guidance. I don’t think you're going to see a huge change in that.
And then just for Toys “R” Us, thanks for the slide in there, that’s really helpful. Just should we assume that the seven remaining are in Propco and are all ground leases? And just sort of in terms of from a modeling perspective it would be helpful. What percentage of your original ABR exposure does that comprise? And maybe you can also give us an update on of those original 17 in new DDR? Do you have LOIs I would add any of those?
I think it’s fair to assume the number of boxes opened essentially or roughly percentage share of our total ABR exposure, which is about 1.5% of ABR, deferred to Matt or Mike on the LOI.
Christy, this is Mike. Right now as far as LOIs for these, I would describe the activity that we’re seeing on this Toys “R” Us group of leases to be significantly stronger than what we saw with some of the previous liquidations. And for the most part, we’re seeing some level of activity and tenant conversations on the vast majority of them right now.
And the last thing, it's hard to say just stay not all ground leases to your initial question.
In terms of the seven remaining they’re not all ground leases?
They're actually a mixture.
Our next question comes from Ki Bin Kim with SunTrust. Please go ahead.
Can you talk about the lease spread activity and the CapEx associated to it? Obviously, you guys show a pretty healthy lease spreads from new leases, but as I look at CapEx on disclosure, it looks like you paid about $8.70 per square foot compared to a gross rent of 19. So net effective rate of tenants, I know the stuff can around quarter-to-quarter but anymore details you can provide there?
This is Mike. I think part of the question you just answered. From quarter-to-quarter, you do have a lot of volatility and bumpiness. This particular quarter, probably two thirds of the leases that we completed were anchor leases and anchor leases by nature are generally going to be considerably more expensive, particularly when you're taking a large space and doing any types of splitting of the space. So, I think it's a function more of just this particular quarter and heavy anchor leasing activity then fundamental trend.
Just a follow-up here is, one lease in particular this quarter that happened to be more expensive than the others that happens from time to time, but I would say as usual look please-please-please, look at the trailing 12 month numbers as opposed to what’s happening in any given quarter. We don't -- we’re not seeing any change in the economics of what we’re negotiating.
Just going broader, you touched on it but can you just give us a little sense of how tenant negotiations have evolved over the past year and things tenants are asking for and things that you're giving, if that's changed at all?
Honestly, I don’t see a huge amount of change in the overall trend of how the leases are structured and the gives and takes. The tenants are aggressive and we’re aggressive as well and for the most part I think the general structure of the leases has not changed dramatically. With the exception of the fact that we are heavily pushing the shop leasing activity and I think in the shop leasing realm, we tend to have a very favorable lease result little bit shorter terms, lower CapEx, and higher rent. But aggregately across the national, change is not a huge difference.
Mike, do you want to speak to the portfolio overall, how that’s changed and potentially changed leasing dynamics since these are your portfolio?
Yes, this particular portfolio now that we’ve pruned it and we’re really focused on the -- we consider to be the best real estate. We’re finding the leasing effort and the negotiations so much stronger in our favor and the fact that most of the tenants are looking at an open to buy that is focused on specific locations throughout the country. And the locations that we left in our overall wholly-owned portfolio tend to be great locations that tenants are willing to pay good rents for. Their decisions are based on their top line sales estimate and generally they are seeing top line sales estimates here. So, we have a lot of strength in our negotiating power here.
So as, how about the time to get a deal done, has that gone better?
The time to get a deal done still tends to be -- it tends to be tough. The negotiation process takes a while, but we are finding that the time from the initial conversation to rent commencement has been shortened. But I attribute that less to the lease structure than to our own internal organization and how where -- we've developed a nice streamline program here from the leasing team to the construction team to the property management team and the turnover.
Our next question comes from Rich Hill with Morgan Stanley. Please go ahead.
I want to come back to maybe guidance, I'm sorry if I missed during your prepared remarks. I'm recalling what you said maybe the last earnings call. Can you talk about 2Q being the trough for same-store NOI? So I guess maybe there are some market expectations that you might increase to guide this quarter and given what looks to be a pretty decent print in the quarter relative to what you put out for the first half. I'm just wondering, is this primarily related to the Toys "R" Us closure is not coming quite as soon as you were expecting and therefore your sort of being still being conservative in terms of raising the guide?
Yes, I wouldn't read anything into it. I did say in my prepared remarks that we now affect the tough to occur in the third quarter. Obviously, for our budget, we're going to have a bigger hit there now just because of those delays that you referred to. There is nothing particularly insidious. In our guide, we are only half way through the year. We're in a dynamic environment that the headline bankruptcies as I think many people have commented appeared to be abating. But that doesn’t mean you can't have a bunch of paper cuts in the portfolio that extra due in some add up to a material impact. So, there is nothing that we know about we're just trying to be I think careful about that. And the fact that fundamentals are still somewhat uncertain environment out there.
And just one follow-up. Going back to net effective rent, look I guess if I'm looking at the net effective rent as sort of a percentage of your average rent per square foot. I recognize they can be noisy and even if I'm looking at the trailing 12-month numbers, it looks like it's been -- CapEx has been steadily increasing and so look, number one, I applaud you for providing us that transparency I wish everyone did it. And there is nothing wrong we're saying CapEx is going up, but is it CapEx going up and our tenants requiring more CapEx spend? Are you feeling like you have to put more CapEx in obviously, new DDR's growth story and you have vacancies that can be filled? How we should think about that? And are we supposed to continue to see this sort of trending CapEx going forward?
Yes, Rich I mean I love to compare notes with you. It is not our view that CapEx particularly on a per square foot basis et cetera. The economics, we don’t think are changing materially. We've said have you know we've talk a lot about the fact that our mix of leases has changed. We're doing more anchor deals because of the recent bankruptcies we've had that obviously impacts aggregate CapEx. But we have not seen a material change in the economics. We don't think the trend is negative. So I love to -- as I pointed out I mean for this call, but off line we can compare notes and hopefully we can reassure you that the numbers really aren't not negative the way your analysis is suggesting.
Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Just following up first on the same-store NOI growth in the quarter for new DDR, how much did we longer than expected Toys "R" Us liquidation contribute in the quarter? And then can you comment on, how that's bad debt that's trending versus expectations at this point? And what impact that had on the quarter same-store NOI growth and OFFO results?
I'll take that one. It's Matt. I would just say as I said in my prepared remarks, Toys was part of the outperformance expectations. It was certainly not all of it. I refer to an improvement in bad debt to your question there. We’re definitely seeing the cause of it is, it's probably cyclical who really know, but that is defiantly trending in the right direction. And we also have some faster than expected rent commencement at some of the anchors we have expected to open. So, it was a mixture of things but Toys was certainly a very important factor.
Okay and then Matt, you mentioned that one of the changes you need, I guess from the NAREIT presentation that you will be excluding the 1% disposition fee for OFFO going forward. So, the RVI fee income that was lower by $0.04 share so about $7.5 million so I presume that $0.04 difference is an entirely disposition fees. What else is changing their? And thenis there anything else in that OFFO bridge worth noting?
Todd, just to clarify on RVI fees. So, essentially, it was $0.04 a share of the pick up from the second to the third quarter of NAREIT. We’re now saying it's just $0.03 and difference is entirely attributable to the disposition fee. So, as we guide through start of the year, we talked about $10 million in the back half of the year that’s unchanged. And the differences is from the NAREIT presentation is entirely attributable to disposition fees.
Does that answer your question?
Yes, I think it does. I have to take a quick look at those two and reconcile it back to you perhaps. But just one last one then any additional RVI related charges that are yet to be incurred by new DDR as of June 30, and if so, how much is that?
Some very small item, but nothing that you’re going to notice.
Our next question comes from Samir Khanal with Evercore. Please go ahead.
Maybe Matt, can you talk around the potential accounting changes around internal leasing because that can impact FFO in '19? I just want to make sure, it feels like when I look through you supplement I get the sense that the G&A expense already includes, you already expensing some of these line items. Is that correct? So there shouldn't be an impact.
I’m going to hand that over to our Chief Accounting Officer, Christa Vesy, who spent more time and she cares to on this topic.
Sure, hi. Samir. You’re exactly right. I think as everyone knows we actually RV today, expense the majority of those internal leasing cost, and we’re going to factor that into our 2019 guidance. But I would today we’re saying that impact of the change in the capitalization should be relatively small.
And I guess my second question is looking at the recovery ratio, it's still a bit in the quarter and had about on my math about 50 basis point on NOI growth. From a modeling perspective, how should we think about that ratio going forward? And kind of what's driving that?
Like last quarter, we had some movement in the other direction last quarter. I’d just say that it is a variety of different things that cause it, it's very granular. Pleased, I think just look at the trailing 6 or 12 month number on that especially trailing 12 month number, I think you will see that it's been very, very flat. So I’d just kind of use that number as you go forward.
Our next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.
So just a few questions quick. Matt, on the Blackstone JV, you said there was a positive $2 million revaluation. So one, was that in FFO? And then second, you mentioned about a 6.5% sort of earnings yield. So just curious if you could provide the balance of that's what we should be modeling as far as an income level or for second half yield that you cited with in reference to something other than the P&L impact?
The evaluation would not be in our FFO that we reported. So that's not part of it. The 6.5% is relates to the balance of our preferred right, that’s really -- we're only a 5% owner in these assets. So that 5% number could move a little bit depending on prices that are sold. But the preferred piece is really the basis for your 6.5%, so the 6.5% cash coupon that we are paid by Blackstone by the joint venture, I should say on our balance.
So that number is flat. That’s not really -- the balance will change to some degree based on market pricing. But your 6.5% and the book value we have got today as your best number for using your modeling going forward. There is also I should remind you there is an additional 2% that we received the payment incline which we were no longer recognizing in our GAAP net income. But that number is there and that will change the value of our preferred on the margin over time as well.
And then on Toys. So you guys were saying it goes away in third quarter '18. So the full impact if we go from sort of 2Q to 4Q, the total impact on a per earnings basis from Toys going away until obviously that space gets backfilled. How would you quantify that? Is that like a penny of earning, two pennies? So how should we think about that?
Yes, we haven’t boil down specific FFO guidance. I think our view is that you can look at we have provided the table on our slides that give you a very good feel for how much has closed. You calculate a pro rata number based on that and you are not going to be far off.
The only thing I’d add. As Mike alluded to, we've had some pretty substantial leasing activity over the last 6 to 9 months and so you'll see some offset now in both small shop and anchor size.
And then just some final questions for David. David, you are through the RVI so that’s behind. But you have also talked about a desire to delever further while obviously you know there is CapEx, there is re-tenanting, better redevelopment that you guys want to do. In your view in your philosophy, do you think that as your focus more than DDR should grow every year, so let's say there's a commitment to grow DDR FFO 6% a year and that’s what's going to be the driver and the other elements, whether it's deleveraging or CapEx et cetera will be model around that? Or is that not the focus? And the reason I ask is, obviously, prior to you guys there DDR for a long had flat lined FFO just as it was trying to improve the balance sheet and recycling get better assets. But FFO kept sort of went nowhere, so just sort of curious now that you're beyond RVI. What should we expect as far as earnings growth? And where that stands in the priority list?
Alex, it’s a great question. It's certainly something we talk about quite a bit here. I will say that by the time we get to the Investor Day conference, we’ll have a more robust discussion and some graphics that will help you all understand how you should think about our strategy going forward. I think for this kind of time period, a couple of weeks after RVI started trading, and a couple of months before our Investor Day conference, we’re really just focused on stability and the safety of the company with great assets.
And I do think that our EBITDA will grow, and I think our leverage targets are very reasonable. They’re showing nothing wrong with lower leverage, but for right now, I think we’re heavily focused on recycling. We’re looking at external opportunities, but we really haven't laid out long-term targets for the volume of those opportunities, primarily because they’re opportunistic.
Our next question comes from Haendel St. Juste with Mizuho. Please go ahead.
A couple quick ones from me. First, I guess the question on tenant retention which looks like it’s been at or new all-time high, as you’ve laid about 90% on the same-store, 75% on the total pool. I guess I am curious what you’re -- what do you think of the retention levels here? And how do you think about retention perhaps drifting lower? Or do you think about retention drifting lower over the next couple years?
Well, right now, I think we’ve got pretty stable portfolio in good markets where the tenants are performing well. So that is helping drive the retention level maintenance. And I think in general, there's a lot of times where you see some rise and some fall in some of the shop tenants. But generally I don't see any trend; other than that we’ve got good real estate and as result I think the retention should maintain a pretty high level.
And then on the dispositions during the second quarter, I am curious just for some incremental color. Were there any portfolio buyers that you noticed have changed in perhaps the composition, the overall demand, any change in the financing? I understand that the financings been there, any incremental perhaps a change on that front?
We really haven’t -- I mean we’ve sold so many assets in a last year and a half, and I would say that everyone has an individual decision. I mean the thing I think you have to remember when looking at our supplemental is that, it’s tempting to want to make macro assumptions about trends. And the reality is, we’ve 78 assets now and those 78 assets have spaces that are at specific intersections and specific townships.
And our leasing staff and our redevelopment staff focus on each individual property. It is very hard with the portfolio this concentrated in high income markets with only 78 properties to make kind of sweeping assumptions. I think that’s kind of the one key point that we’ll be dealing with probably for a year or so until folks get used to the fact that our portfolio is much more concentrated.
And just to clarifying one more, the pool of buyers -- were there any portfolio buyers? Were these one-offs or any sales of any bulk?
They all went off.
Our next question comes from Brian Hawthorne with RBC Capital Markets. Please go ahead.
When you guys think about funding future investments and you look at kind of raising the capital from dispositions. Do you have to sell anymore consolidated assets? Or would selling the some of these unconsolidated joint ventures be enough?
Everything is unfavorable. It really comes down to what's the opportunity at the time and do we think our shareholders are going to get better value from recycling unconsolidated versus consolidated.
Our next question comes from Vince Tibone with Green Street Advisors. Please go ahead.
I have one more question on kind of leasing and retaining CapEx. How much does the kind of total CapEx cost per square foot vary, if your backfilling let's say, Toys are box for the single tenant or if you have to divide the box and kind of into two or three spaces. What's the kind of cost per square foot difference on to those backfilling options?
This is Mike. Generally, if you are taking a single tenant and putting in the space versus splitting it into two, you are going to probably see about a 25% increase in the total CapEx necessary to fill that space.
Are there any kind of rule of thumb numbers you can provide almost say a 40,000 square foot box in terms of expected landlord work and CIs steps up?
It completely depends on the tenants that you are looking at. The difference is really focused on the demising of the space, splitting the utility to store fronts and things like that.
Again, it's really -- I know it would be wonderful to kind of figure out on average what are the differences. I think you can look at individual deals, but the fact the matter I said the type of the building and the age, the column structure, how much power is on the site? Do you have enough clearance? Is there a mezzanine? If you go on and on and on and the difference between putting boxes in Boston versus Kansas is a big labor difference.
So it's very hard for us to make kind of sweeping average is on cost. I think as we look at them we're simply looking at our return, and so the rents are different in those markets as well, and depending on where there was a splitting a box to putting it a single tenant in. It really comes down to how much value we think we are creating for our shareholders.
And so, my next one is just really overall industry, how do you think the backfilling of Toys is going to differ from a backfilling of sports authority. Are you seeing kind of new tenants to merge or different merchandize categories or the kind of the similar kind of cast of tenants we've seen over the past through years? And then just anymore color you could share on kind of the need or desire to split spaces versus finding single tenant backfills. Do you think any really notable trends on those fronts are different than sports authority in your opinion?
First of all, the level of interest is higher as far as who is interested. And right now, across our portfolio and much of this is for backfilling Toys "R" Us basis, but it also applies to virtually introducing your box space we are looking at. We are actively negotiating deals right now with at least 20 major national healthy companies, ranging from the off price guys like Burlington Ross, the TJX brands, all the way over to specialty grouters like Lucky's, Sprouts. We're doing and having conversations with Publix, Kroger, Home Food, Total Wine, I mean the list is pretty extensive. And all of those are going to be potential candidates and all of those are healthy companies that are growing right now.
Do you want to comment on the splitting dynamics and….
Yes, generally, when it comes down to a decision as to whether we are going to split space or do a single tenant use. It really comes down to what's going to be the best for that particular center and where we think we are going to get the best economic return. If a tenant is interested in the space and their rent is in particularly attractive versus, if there is two tenants interested in the space and the rent is significantly better than the returns in spite of possibly more CapEx, we're going to choose the latter. And it comes down to the financial decision on the returns of every deal.
I would say on the margin, it's still very early days, but I would say that it sounds from the feedback Mike has been giving us. It sounds like there may be fewer splits here than we originally feared, not really to kind of hang our thing yet, but the initial evidence is I'd say enough to its cautionary optimistic.
Defiantly, we’re going to see fewer split as part of the Toys then what we saw part of that is because Babies "R" Us is a smaller space. You don't need to split them.
One last quick one if you don’t mind, you have to quantify the same-store NOI impact of Toys "R" Us between 19 and 20 -- sorry 18 and 19 kind of like do you see the impact now actually being more on 19 then 18 given that the drawn out process?
It's not clear yet to be honest with you. You can see the timing right. I think maybe on the margin to get a little more in 19 depending on exactly how this all plays out, but I think it's still too early to know the answer of that question. I mean the good news is there is quarter from now we will know the answer right like it.
Our next question comes from Collin Mings with Raymond James. Please go ahead.
Just going back to your comments on shop leasing, a few quarters ago, you outlined kind of a pre-spend $40 million NOI opportunity associated with leasing up from shop space. Just curious if you think about new DDR and obviously you highlight in lot of comments this part some of the leasing momentum. Just how would you characterize that small shop opportunity going forward?
As far as the overall opportunity going forward with shops, it really comes down the way we focused on it is strictly looking at it from and opportunistic standpoint as to where we can drive rents and drive occupancy with shop leasing. Overall, the growth potential in shop is still a significant number and we would tally that and can get back to where we think right now. But ultimately we think we're striving for being in the low to mid 90% occupancy rate.
Okay and than just maybe pinpoint out to NOI opportunity -- overall NOI opportunity that I'd be something kind of for the Investor Day that you guys might be able to provide?
Yes, exactly, we haven’t filled that. Again, we thought we haven’t done that. Obviously, in absolute dollars terms, it has to be smaller. But I think relative to the size of portfolio, I think you actually find potentially a bigger opportunity. So, we will quantify that better for you.
There is no question after the spinoff with a portfolio we have today. If you think of the drivers of small shop occupancy, If you are in wealthier market there is more discretionary income and those people can afford a wider variety of shops right serving their communities. If the anchor tenants are driving high sales and traffic, which means you're more likely to drive more shop demand and the more shops you lease the fewer vacancies are available which means that the demand is for a scarcer amount of inventory. So, I think we feel like curating the portfolio gives us a little bit of fuel, to feel confident that we're getting a lot of traction on the shop leasing.
Okay got you, just kind of a self reinforcing cycle there on leasing activity.
As long as long as economic forces -- macroeconomic forces are positive which they are. But as you all know, shop occupancy is much more correlated to GDP and employment rate and then boxes are.
Good point, and than just going back to you guys represented in the prepared remarks and it’s been a couple of questions already on it. But just maybe trying to put a little bit finer points on the comments you guys have gone back to. You're saying that Toys is going better than prior liquidations in the prior question. And in the prior question you've kind of commented on maybe having to divide up the boxes left somewhat that being a box size component to some degree. But just bottom line, what do you think is really driving better demand that turnaround relative to prior liquidations?
Again, it's the quality of the portfolio is better. The centers that we are attracting tenants to for the vacant Toys space is aggregate, we have a better portfolio and has greater demand from the tenants than the prior situation.
Our next question comes from Craig Smith with Bank of America. Please go ahead.
What are the plans for the dividend at new DDR now that you have been through the spinoff?
It’s a great question Craig. As you can imagine as our board thought about, the proposal from management to execute a spin one of the large conversations was around dividend. As you know the dividend policy is squarely in the decision-making authority of the Board of Directors. I think what we have said on previous calls is that management has made a recommendation, but boards vote on that dividend is not for a little bit.
I mean is there anything that at least management would like to get in terms of the spread between FFO and the payout for more cash to reinvest?
I’d just reiterate what we said before on this which is on a full adjusted basis it's at least $0.20 per share. So, you can do your math from there. We did saw materially, materially lower AFFO payout ratio and that’s the recommendation that we intend to make to the board.
Our next question is from Mike Mueller with JP Morgan. Please go ahead.
My questions were answered. I’m trying to jump out of the queue. Thanks.
[Operator Instructions] Our next question is a follow-up from Christy McElroy with Citi. Please go ahead.
It's Michael Bilerman here with Cristy. I just had a few questions. Just in terms of the Investor Day and thank you for moving it off of the Jewish Holidays to October. Are you planning in all? I know you want to focus on your strategic priorities the portfolio redevelopment opportunities honing on the 78 assets that you are doing. I guess are you going to plan on doing forward sort of three-year financial plan in terms of cash flow FFO and projected NAV growth in that context?
I think that our goal is to make sure that the investment community is able to think clearly about what our future looks like. And so the components of that will certainly be laid out over a multiyear period. The variable of course is external growth in investment dollars, which is more difficult but I certainly think we can make a pretty credible case we have enough time to dig into the details of every single asset, and with 78 wholly owned assets making up 90% of our NOI. It means that we have got a lot of clarity that our opinion is to what the next few years look like.
So we will get the components but not necessarily per share estimates of the three year plan?
I don’t want front run things. Michael, you've saw what we did at Equity One on the first time. We were trying to put together a multiyear plan. We need to -- this isn’t just about pretty slides and a nice show. This is about helping you and our investors walk away with a very clear idea of what to expect from DDR's economics going forward, right. If we get to where -- there is some things will definitely deliver on per share basis, some things who will not. We are still formulating everything, but I feel confident that you will walk away feeling like understand like you understand what the cash flow profile this Company will be for the next X years.
And outside of the management team I guess how will the board and specifically auto be involved in the industry today?
Well, the board members are generally enthusiastically asked to attend and act as board members, which is they’re not presentations. I certainly wouldn’t expect that any individual board member would be speaking about his or her shareholdings. It’s a management presentation about what management believes, the strategy is going to result in after having worked with the board for last year and a half.
But you would expect if you were in our chair you would absolutely preview the sort of thing with the board, you wouldn’t go out there and present things that the board was hearing about for the first time and explicitly getting blessed, so you’re asking about Board interaction ahead of time, you would be right to expect that we wouldn’t be out there with something that we thought they viewed us highly disagreeable.
I was just making sure whether you’ll be providing the opportunity for analysts and investors to interact, and ask questions to the Board, especially as you get new members on not sure where that process stands today and if you can provide an update that would be great, but just sort of those interactions I think given the history and given the changes certainly would be helpful from an interaction perspective, so, I don’t know if you -- if David you want to provide a little bit of color where you stand right now with further changes to the board and additions and things like that?
There’s been a committee that is working under the nominating and corporate governance chair. We have been actively engaged in interviewing candidates for board seats. We’ve gone through skills that each person on board has had a chance to opine about what they think is a great skill set going forward, given what this company looks like. And so far I feel inspired by the number of candidates and the interest in the kind of diversity and the breadth of knowledge that we can bring on to our board, it would be very helpful.
So I think the whole board is a little bit energized about the prospect of some fresh blood. Having said that going back to your original question the Investor Day is the management presentation and so I think if there is a desire to have contact with certain directors, I don't believe that the Investor Day is one that we would promote as also being a board interaction.
Okay, that is unfortunately, but I think there is certainly an opportunity to have especially for traveling in for it especially from Germany. Just with a quick question. The 190 million preferred that you’re going to hold at RVI. Matt, how are you going to treat that from balance sheet perspective? I don’t know if you’re just going to mark that at book value, but there is some other valuation methodology we should be thinking about?
No, it's very cost basis, so there’s no funding business there.
So it's just 190 will be on your balance sheet?
Correct.
And then lastly just on the Vimeo venture with the Walmart centers in Phoenix. Can you give a little bit more color how that came about? Was it your Walmart relationship? Was it some outreach that you had with Vimeo? How did your involvement come about relative to other potential landlords in Phoenix?
We’re not involved with Walmart, it is basically just two separate relationships. There is Vimeo-Walmart relationship and then there’s a Vimeo-DDR relationship. Vimeo effectively is based in Chandler, Arizona and Ahwatukee Foothills shopping centers there. And our SVP of IT has a relationship with Google and ultimately was able to set up and build a relationship with Vimeo and we were able to strike this arrangement.
This concludes our question-and-answer session. I would like to turn the conference back over to David Lukes for any closing remarks.
Thank you all very much and we look forward to next quarter.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.